Determinants of Bank CDS Spreads in Europe

Abstract

This paper empirically analyzes the determinants of credit default swap (CDS) spreads from a sample of 45 listed European banks over the 2004-2010 period. We use variables related to accounting- and market-based data, an indicator of liquidity in the CDS market and several variables from the macroeconomic environment in which these financial institutions operate. These variables are analyzed during both the pre-crisis period (2004-2007) and the crisis period (2008-2010). The primary conclusion is that the market variables have the greatest explanatory power. Additionally, we find that the explanatory power of the model is considerably higher during the crisis period than it is during the pre-crisis period.

Keywords: credit default swaps, European Banks, CDS spreads, bank risk, accounting, market and macroeconomic information, liquidity

JEL Classification: C52, G21, G33, M41