The Systemic Risk of European Banks During the Financial and Sovereign Debt Crises

52 Pages Posted: 28 Nov 2012

See all articles by Lamont Black

Lamont Black

DePaul University - Driehaus College of Business; Center for Financial Services

Ricardo Correa

Board of Governors of the Federal Reserve System

Xin Huang

Board of Governors of the Federal Reserve System

Hao Zhou

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: November 27, 2012

Abstract

This paper designs a systemic risk measure for the European banking system as a hypothetical distress insurance premium (DIP), which integrates economically the main characteristics of systemic risk — size, default probability, and interconnectedness. We further identify the individual contributions of 58 major European banks to the systemic risk measure. We find that the European banking systemic risk reached its height in late 2011 around €500 billion, and the sovereign default factor is the dominant driver for the European debt crisis. Our approach identifies a number of systemically important European banks, but smaller Italian and Spanish banks as groups have notably increased their systemic importance. Our findings provide support for the European-wide macroprudential regulation of banking systemic risk.

Keywords: European debt crisis, macroprudential regulation, banking systemic risk, credit default swap, too-big-to-fail, interconnectedness, leverage

JEL Classification: G15, G21, G28

Suggested Citation

Black, Lamont and Correa, Ricardo and Huang, Xin and Zhou, Hao, The Systemic Risk of European Banks During the Financial and Sovereign Debt Crises (November 27, 2012). Available at SSRN: https://ssrn.com/abstract=2181645 or http://dx.doi.org/10.2139/ssrn.2181645

Lamont Black

DePaul University - Driehaus College of Business ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
312-362-5617 (Phone)
312-362-6566 (Fax)

HOME PAGE: http://driehaus.depaul.edu/faculty-and-staff/faculty/Pages/black-lamont.aspx

Center for Financial Services

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

HOME PAGE: http://https://business.depaul.edu/about/centers-institutes/financial-services/Pages/default.aspx

Ricardo Correa

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Xin Huang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Hao Zhou

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China
86-10-62790655 (Phone)

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