Credit Risk 'Beta': The Systematic Aspect of Bank Default Risk

42 Pages Posted: 30 Sep 2015

Date Written: June 2, 2015

Abstract

Using information in US and European bank and sovereign CDS spreads we study the systematic component of banks’ credit risk that stems from banks’ common exposure to sovereign default risk. Based on a default intensity model, we find that sovereign default risk is a significant factor of bank default risk. During the period 2008-2014, on average US banks are much less sensitive to sovereign risk than their European counterparts. Within Europe the systematic component accounts for quite different proportions of the total bank default risk across countries. We also empirically confirm the asset holdings channel of the risk contagion theory by showing that a bank’s credit risk Beta (a bank’s sensitivity to sovereign risk) estimated with our model is positively related to its holdings of sovereign debt. Our findings have policy implications with respect to financial stability.

Keywords: Banking/Financial intermediation, financial crisis, credit default swap, sovereign risk

JEL Classification: G01, G12, G21, G28

Suggested Citation

Zhao, Lei, Credit Risk 'Beta': The Systematic Aspect of Bank Default Risk (June 2, 2015). Paris December 2015 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2667055 or http://dx.doi.org/10.2139/ssrn.2667055

Lei Zhao (Contact Author)

ESCP Europe ( email )

79 Avenue de la République
Paris, 75011
France

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