The Fundamental Determinants of Credit Default Risk for European Large Complex Financial Institutions

IMF Working Paper WP/10/153

32 Pages Posted: 10 Apr 2011

See all articles by Inci Otker Robe

Inci Otker Robe

International Monetary Fund (IMF)

Jiri Podpiera

International Monetary Fund (IMF)

Date Written: June 2010

Abstract

during the initial phase of distress in selected European Large Complex Financial Institutions (LCFIs). It uses yearly data over 2004–08 for 29 European LCFIs. The results from a dynamic panel data estimator show that LCFIs’ business models, earnings potential, and economic uncertainty (represented by market expectations about the future risks of a particular LCFI and market views on prospects for economic growth) are among the most significant determinants of credit risk. The findings of the paper are broadly consistent with those of the literature on bank failure, where the determinants of the latter include the entire CAMELS structure - that is, Capital Adequacy, Asset Quality, Management Quality, Earnings Potential, Liquidity, and Sensitivity to Market Risk. By establishing a link between the financial and market fundamentals of LCFIs and their CDS spreads, the paper offers a potential tool for fundamentals-based vulnerability and early warning system for LCFIs.

Keywords: Large Complex Financial Institutions, dynamic panel data, Credit Default Swap, CAMELS, vulnerability analysis, early warning systems

JEL Classification: G21, G28, C12

Suggested Citation

Robe, Inci Otker and Podpiera, Jiri, The Fundamental Determinants of Credit Default Risk for European Large Complex Financial Institutions (June 2010). IMF Working Paper WP/10/153, Available at SSRN: https://ssrn.com/abstract=1805825 or http://dx.doi.org/10.2139/ssrn.1805825

Inci Otker Robe (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Jiri Podpiera

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
98
Abstract Views
791
rank
343,774
PlumX Metrics