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Development and determinants of systemic risk in European banking - an empirical note

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  • Helmut Herwartz
  • Martin Siegel

Abstract

Compared with the broad supply of theoretical approaches towards systemic risk in (international) banking systems empirical contributions measuring its degree or potential triggering factors are rather scarce. Kwast and de Nicolo (2002) put systemic risk and (conditional) stock price correlations into a unique relation. Adopting this perspective, we provide a dynamic conditional correlation (DCC, Engle, 2002) analysis for the European banking sector. Our sample period covers establishment and advent of the Euro. Apart from time variation of correlation measures we investigate the content of exogenous factor variables to explain correlation patterns. Overall, we find a moderate and stable average level of systemic risk in European banking. The advent of the Euro came along with a 1-year period of short-run transition dynamics. Systemic risk is found to increase over states of high uncertainty in national stock markets and states of small-to-medium variation in European interest rates.

Suggested Citation

  • Helmut Herwartz & Martin Siegel, 2009. "Development and determinants of systemic risk in European banking - an empirical note," Applied Economics Letters, Taylor & Francis Journals, vol. 16(4), pages 431-438.
    • Handle: RePEc:taf:apeclt:v:16:y:2009:i:4:p:431-438
    DOI: 10.1080/09603100802047027
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    References listed on IDEAS

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    1. Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-638, August.
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