Bank Risk Behavior and Connectedness in EMU Countries

44 Pages Posted: 19 Jun 2015

See all articles by Manish Singh

Manish Singh

University of Barcelona; Indira Gandhi Institute of Development Research (IGIDR)

Marta Gómez-Puig

Economic Theory Department. University of Barcelona

Simon Sosvilla-Rivero

UCM Institute for Economic Analysis

Date Written: June 18, 2015

Abstract

Given the structural differences in banking sector and financial regulation at country level in European Economic and Monetary Union (EMU), this paper tries to estimate the banking sector risk behavior at country level. Based on contingent claim literature, it computes “Distance-to-default (DtD)” at bank level and analyses the aggregate series at country level for a representative set of banks over the period 2004-Q4 to 2013-Q2. The indices provide an intuitive, forward-looking and timely risk measure having strong correlations with national/regional market sentiment indicators. An underlying trend exists but causality tests suggest no systemic component. Cross-sectional differences in DtD suggests fragility in EMU countries 12-18 months prior to the crisis and better predictive ability than the regulatory index based on large and complex banking institutions at European level. Furthermore, we explore the reasons for this divergence using VAR estimates.

Keywords: Contingent claim analysis, Distance-to-default, Banking risk

JEL Classification: G01, G13, G21, G28

Suggested Citation

Singh, Manish and Gómez-Puig, Marta and Sosvilla-Rivero, Simon, Bank Risk Behavior and Connectedness in EMU Countries (June 18, 2015). Available at SSRN: https://ssrn.com/abstract=2620204 or http://dx.doi.org/10.2139/ssrn.2620204

Manish Singh

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Mumbai, Maharashtra 400065
India

Marta Gómez-Puig

Economic Theory Department. University of Barcelona ( email )

Diagonal 690
Barcelona, 08034
Spain
34-93-4020113 (Phone)
34-93-4039082 (Fax)

Simon Sosvilla-Rivero (Contact Author)

UCM Institute for Economic Analysis ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

Register to save articles to
your library

Register

Paper statistics

Downloads
23
Abstract Views
473
PlumX Metrics