Assessing Systemic Fragility – A Probabilistic Perspective
SAFE Working Paper No. 70
39 Pages Posted: 25 Oct 2014
Date Written: October 1, 2014
We outline a procedure for consistent estimation of marginal and joint default risk in the euro area financial system. We interpret the latter risk as the intrinsic financial system fragility and derive several systemic fragility indicators for euro area banks and sovereigns, based on CDS prices. Our analysis documents that although the fragility of the euro area banking system had started to deteriorate before Lehman Brothers' file for bankruptcy, investors did not expect the crisis to affect euro area sovereigns' solvency until September 2008. Since then, and especially after November 2009, joint sovereign default risk has outpaced the rise of systemic risk within the banking system.
Keywords: Banking Stability, Financial Distress, Tail Risk, Contagion
JEL Classification: C16, C61, G01, G21
Suggested Citation: Suggested Citation
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By Deyan Radev