Do Information Contagion and Business Model Similarities Explain Bank Credit Risk Commonalities?

42 Pages Posted: 5 Nov 2020

See all articles by Dieter Wang

Dieter Wang

World Bank

Iman van Lelyveld

De Nederlandsche Bank; VU University Amsterdam

Julia Schaumburg

Tinbergen Institute; VU University Amsterdam

Multiple version iconThere are 3 versions of this paper

Date Written: May 1, 2019

Abstract

This paper revisits the credit spread puzzle for banks from the perspective of information contagion. The puzzle consists of two stylized facts: Structural determinants of credit risk not only have low explanatory power but also fail to capture common factors in the residuals. We reproduce the puzzle for European bank credit spreads and hypothesize that the puzzle exists because structural models ignore contagion effects. We therefore extend the structural approach to include information contagion through bank business model similarities. To capture this channel, we propose an intuitive measure for portfolio overlap and apply it to the complete asset holdings of the largest banks in the Eurozone. Incorporating this unique network information into the structural model increases explanatory power and removes a systemic common factor from the residuals. Furthermore, neglecting the network likely overstates the importance of structural determinants.

Keywords: bank business model similarities, credit spread puzzle, dynamic network effects model., information contagion, portfolio overlap measure

JEL Classification: G01, G21, C32, C33, C38

Suggested Citation

Wang, Dieter and van Lelyveld, Iman and Schaumburg, Julia and Schaumburg, Julia, Do Information Contagion and Business Model Similarities Explain Bank Credit Risk Commonalities? (May 1, 2019). ESRB: Working Paper Series No. 2019/94, Available at SSRN: https://ssrn.com/abstract=3723456 or http://dx.doi.org/10.2139/ssrn.3723456

Dieter Wang (Contact Author)

World Bank ( email )

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Iman van Lelyveld

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

VU University Amsterdam ( email )

Netherlands

Julia Schaumburg

VU University Amsterdam ( email )

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+31 (0)20 59 82653 (Phone)

HOME PAGE: http://juliaschaumburg.com

Tinbergen Institute ( email )

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Amsterdam, 1082 MS
Netherlands

HOME PAGE: http://juliaschaumburg.com

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