69 Pages Posted: 1 Nov 2013 Last revised: 29 Jul 2014
Date Written: October 31, 2013
We develop a multivariate credit risk model that accounts for joint defaults of banks and allows us to disentangle how much of banks' credit risk is systemic. We find that the US and UK differ not only in the evolution of bank systemic risk, but also in their banks' systemic exposures. In both countries, however, systemic credit risk varies substantially, represents about half of total bank credit risk on average, and induces high risk premia. The results suggest that sovereign and bank systemic risk are increasingly interlinked in the UK.
Keywords: Systemic Bank Credit Risk; Credit default swaps; Sovereign Credit Risk; Distress Risk Premia; Bayesian Estimation
JEL Classification: F34, G12, G15
Suggested Citation: Suggested Citation
Li, Junye and Zinna, Gabriele, On Bank Credit Risk: Systemic or Bank-Specific? Evidence from the US and UK (October 31, 2013). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2347961 or http://dx.doi.org/10.2139/ssrn.2347961