Bank risk behavior and connectedness in EMU countries

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 analyzes 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.

• Publication year

  2015

• Venue

  Journal of International Money and Finance

• Publication date

  2015-06-18

• Fields of study

  Business, Economics

• Identifiers
  DOI 10.1016/j.jimonfin.2015.07.014
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• DtD has better predictive ability than the regulatory index based on large and complex banking institutions at European level.

  Confidence 0.93

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewAnonymous (b2adb6bfad) reviewGahyoun (29ua5897xm) review
• Cross-sectional differences in DtD indicate fragility in EMU countries 12–18 months before the crisis.

  Confidence 0.94

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewAnonymous (b2adb6bfad) reviewGahyoun (29ua5897xm) review
• The aggregate DtD series shows an underlying trend, but causality tests do not support a systemic component.

  Confidence 0.90

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewAnonymous (b2adb6bfad) reviewGahyoun (29ua5897xm) review
• Distance-to-default (DtD) is a forward-looking and timely bank-risk measure, and its country-level aggregate series correlates strongly with national and regional market sentiment indicators.

  Confidence 0.95

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewAnonymous (b2adb6bfad) reviewGahyoun (29ua5897xm) review

• causality tests

  statistical tests

  Statistical tests used to assess directional predictive relationships among the time series studied.

  Aliases: causality test

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewAnonymous (b2adb6bfad) reviewGahyoun (29ua5897xm) review
• country-level aggregate series

  time series

  The time series obtained by aggregating bank-level DtD values within each country.

  Aliases: aggregate series at country level, country aggregate DtD series

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewAnonymous (b2adb6bfad) reviewGahyoun (29ua5897xm) review
• distance-to-default (dtd)

  risk measures

  A contingent-claim-based bank risk metric that measures how far a bank is from default.

  Aliases: DtD

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewAnonymous (b2adb6bfad) reviewGahyoun (29ua5897xm) review
• emu countries

  regions

  The European Economic and Monetary Union countries analyzed in the paper.

  Aliases: European Economic and Monetary Union countries, EMU

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewAnonymous (b2adb6bfad) reviewGahyoun (29ua5897xm) review
• national/regional market sentiment indicators

  indicators

  Indicators that capture investor sentiment or risk appetite in national or regional financial markets.

  Aliases: market sentiment indicators

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewAnonymous (b2adb6bfad) reviewGahyoun (29ua5897xm) review
• regulatory index based on large and complex banking institutions at european level

  indices

  A supervisory banking risk index constructed at the European level from large and complex banking institutions.

  Aliases: European regulatory index, large and complex banking institutions index

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewAnonymous (b2adb6bfad) reviewGahyoun (29ua5897xm) review
• systemic component

  risk factors

  A common risk factor that would affect banking risk across countries or institutions at the system level.

  Aliases: systemic risk component

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewAnonymous (b2adb6bfad) reviewGahyoun (29ua5897xm) review
• var estimates

  models

  Estimates from vector autoregression models used to study dynamic relationships among the risk series.

  Aliases: vector autoregression estimates, VAR

  박진우 (dztg5apj7m) extractionB (s683577b42) reviewAnonymous (b2adb6bfad) reviewGahyoun (29ua5897xm) review

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