The Systemic Risk of European Banks During the Financial and Sovereign Debt Crises

60 Pages Posted: 30 May 2017

See all articles by Lamont Black

Lamont Black

DePaul University - Driehaus College of Business; Center for Financial Services

Ricardo Correa

Board of Governors of the Federal Reserve System

Xin Huang

Board of Governors of the Federal Reserve System

Hao Zhou

Tsinghua University - PBC School of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: 2013

Abstract

We propose a hypothetical distress insurance premium (DIP) as a measure of the European banking systemic risk, which integrates the characteristics of bank size, default probability, and interconnectedness. Based on this measure, the systemic risk of European banks reached its height in late 2011 around € 500 billion. We find that the sovereign default spread is the factor driving this heightened risk in the banking sector during the European debt crisis. The methodology can also be used to identify the individual contributions of over 50 major European banks to the systemic risk measure. This approach captures the large contribution of a number of systemically important European banks, but Italian and Spanish banks as a group have notably increased their systemic importance. We also find that bank-specific fundamentals predict the one-year-ahead systemic risk contribution of our sample of banks in an economically meaningful way.

Keywords: banking systemic risk, European debt crisis, too-big-to-fail, leverage, interconnectedness, credit default swap, macroprudential regulation

Suggested Citation

Black, Lamont and Correa, Ricardo and Huang, Xin and Zhou, Hao, The Systemic Risk of European Banks During the Financial and Sovereign Debt Crises (2013). FRB International Finance Discussion Paper No. 1083. Available at SSRN: https://ssrn.com/abstract=2976777

Lamont Black (Contact Author)

DePaul University - Driehaus College of Business ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
312-362-5617 (Phone)
312-362-6566 (Fax)

HOME PAGE: http://driehaus.depaul.edu/faculty-and-staff/faculty/Pages/black-lamont.aspx

Center for Financial Services

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

HOME PAGE: http://https://business.depaul.edu/about/centers-institutes/financial-services/Pages/default.aspx

Ricardo Correa

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Xin Huang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Hao Zhou

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing, 100083
China
86-10-62790655 (Phone)

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