Analyzing Systemic Risk of the European Banking Sector

Handbook on Systemic Risk, J.P. Fouque and J. Langsam, eds., Cambridge University Press, Forthcoming

37 Pages Posted: 23 Sep 2012

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Sascha Steffen

Frankfurt School of Finance & Management

Date Written: September 22, 2012

Abstract

Since the summer of 2007, the financial system has faced two major systemic crises. European banks have been at the center of both crises, particularly of the European sovereign debt crisis. This article analyzes systemic risk of European banks across both crises exploiting the specific institutional nature of the European banking system. We employ the “Systemic Expected Shortfall” concept developed in Acharya et al. (2010) which creates a systemic risk index among financial institutions based on their individual contribution to the capital shortfall of the financial system. We analyze what banks are most systemic in Europe using cross-sectional tests. We then construct a ranking of European banks and European countries as of June 2007 and calculate an estimate of the expected capital shortfall at that time. European governments have supported the banking sector with EUR 4.1 trillion using various support schemes and virtually all banks have raised capital, many of them, however, at steep discounts. We find that markets demand more capital from banks with high exposures to particularly peripheral countries in Europe, that is, banks’ sovereign debt holdings are a major contributor to systemic risk. Using hand-collected data of sovereign debt holdings and impairments, we provide estimates how much capital is needed to restore confidence in the banking sector.

Keywords: Banks, Systemic risk, Europe

JEL Classification: G01, G21, G28, G14, G15, F3

Suggested Citation

Acharya, Viral V. and Steffen, Sascha, Analyzing Systemic Risk of the European Banking Sector (September 22, 2012). Handbook on Systemic Risk, J.P. Fouque and J. Langsam, eds., Cambridge University Press, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2150616

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Sascha Steffen (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

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