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Solvency vs. liquidity. A decomposition of European banks' credit risk over the business cycle

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  • Guillaume Vuillemey

Abstract

This paper provides evidence for the procyclicality of banks' credit risk by investigating the historical resilience of several European banking sectors before and after the 2008 banking crisis. It provides a decomposition of banks' probabilities of default between a solvency and a liquidity component. The results show a gradual build-up of fragilities before 2008 in most countries. Increased probabilities of default are shown to be mainly driven by a surge in liquidity risk, even when shocks of relatively low magnitude are imposed on the system.

Suggested Citation

  • Guillaume Vuillemey, 2014. "Solvency vs. liquidity. A decomposition of European banks' credit risk over the business cycle," International Economics, CEPII research center, issue 137, pages 32-51.
    • Handle: RePEc:cii:cepiie:2014-q1-137-3
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    File URL: http://www.sciencedirect.com/science/article/pii/S2110701713000383
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    Cited by:

    1. repec:prg:jnlpep:v:preprint:id:656:p:1-24 is not listed on IDEAS
    2. Martin Macháček & Aleš Melecký & Monika Šulganová, 2018. "Macroeconomic Drivers of Non-Performing Loans: A Meta-Regression Analysis," Prague Economic Papers, Prague University of Economics and Business, vol. 2018(3), pages 351-374.

    More about this item

    Keywords

    Solvency; Liquidity; Global games; Banking crises; Procyclicality;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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