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Systemic Risk, Banking and Sovereign Debt in the Euro Area

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  • Deyan Radev

    (Johannes Gutenberg University Mainz)

Abstract

We introduce a new systemic risk measure, the change in conditional joint probability of default (∆CoJPoD), that assesses the effects of interdependence within the financial system on the general financial system default risk. We apply our measure to examine the fragility of the European financial system during the ongoing sovereign debt crisis, encompassing 10 euro area sovereigns and 44 European Union banks in the period 01.01.2008 to 31.12.2011. Our results show that joint distress risk has increased since the end of 2009, parallel to decoupling of investors’ perceptions about individual sovereign default risk. Overall, a default of Germany would have the highest contribution to systemic risk, while the effect of Greek default is limited. Regarding the effect of the sovereign debt crisis on the EU banking system, we find evidence for “too-big-to-save”, riskiness-of-business and asset quality considerations when investors assess the banking system’s vulnerability to sovereign risk. Leverage seems to be less informative in that respect. Our model could be an integral part of a policy makers’ tool set to evaluate the usefulness and feasibility of bailout measures.

Suggested Citation

  • Deyan Radev, 2012. "Systemic Risk, Banking and Sovereign Debt in the Euro Area," Working Papers 1207, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz.
    • Handle: RePEc:jgu:wpaper:1207
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    References listed on IDEAS

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    Cited by:

    1. Denis Gorea & Deyan Radev, 2012. "The Determinants of Joint Sovereign Default Risk in the Euro Area," Working Papers 1208, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz.
    2. R. Pianeti & R. Giacometti, 2015. "Estimating the probability of multiple EU sovereign defaults using CDS and bond data," Quantitative Finance, Taylor & Francis Journals, vol. 15(1), pages 61-78, January.

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    More about this item

    Keywords

    Banking Stability; Financial Distress; Tail Risk; Contagion;
    All these keywords.

    JEL classification:

    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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