Extreme Dependencies in the European Banking Sector

Abstract

We investigate the impact of 2008 global financial crisis due to Lehman Brothers collapse on tail dependence structure of the largest systemic banks in euro in a pairwise comparison using bivariate extreme value theory. The dataset includes banks equity prices from area core (Austria, Belgium, France and Germany) and periphery (Greece, Ireland, Italy, Portugal and Spain). We use the multivariate extreme value theory to model the tail dependence structure and we focus on extreme correlation to quantify the downside and upside dependencies. During the European sovereign debt crisis period, our findings reveal that the extreme correlation substantially increases among the banks of the core during the crisis. However, in same period, among the systemic banks in the we observe both increases and decreases to the level of extreme correlation. We also show that during the crisis the probability that shocks transmitted among the systemic banks in the core; and between the systemic banks in core and periphery is significantly higher.

Keywords: extreme correlation, euro area systemic banks, European sovereign debt crisis, core-periphery

JEL Classification: C46, C58, G15, F31