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Determinants of European banks’ default risk

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  • Soenen, Nicolas
  • Vander Vennet, Rudi

Abstract

Using bank CDS spreads, we examine three types of determinants of Euro Area bank default risk in the period 2008–2019: bank characteristics related to new regulation, the bank-sovereign nexus and the monetary policy stance. We find that Basel 3 regulation improves the banks’ risk profile since higher capital ratios and more stable deposit funding contribute significantly to lower CDS spreads. We confirm the persistence of the bank-sovereign interconnectedness and find that sovereign default risk is transmitted to bank risk with an amplification factor. The ECB monetary policy stance is neutral with respect to bank risk, hence we find no evidence of perceived excessive risk-taking behavior.

Suggested Citation

  • Soenen, Nicolas & Vander Vennet, Rudi, 2022. "Determinants of European banks’ default risk," Finance Research Letters, Elsevier, vol. 47(PA).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pa:s154461232100516x
    DOI: 10.1016/j.frl.2021.102557
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    More about this item

    Keywords

    Bank default risk; CDS spreads; Monetary policy; Sovereign risk;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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