Systemic risk and sovereign debt in the euro area : [version 13 december 2013]

  • We introduce a new measure of systemic risk, the change in the conditional joint probability of default, which assesses the effects of the interdependence in the financial system on the general default risk of sovereign debtors. We apply our measure to examine the fragility of the European financial system during the ongoing sovereign debt crisis. Our analysis documents an increase in systemic risk contributions in the euro area during the post-Lehman global recession and especially after the beginning of the euro area sovereign debt crisis. We also find a considerable potential for cascade effects from small to large euro area sovereigns. When we investigate the effect of sovereign default on the European Union banking system, we find that bigger banks, banks with riskier activities, with poor asset quality, and funding and liquidity constraints tend to be more vulnerable to a sovereign default. Surprisingly, an increase in leverage does not seem to influence systemic vulnerability.

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Author:Deyan Radev
Parent Title (German):SAFE working paper series ; No. 37
Series (Serial Number):SAFE working paper (37)
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2013
Year of first Publication:2013
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2014/03/03
Tag:Banking stability; Contagion; Financial distress; Sovereign debt; Sovereign default; Systemic risk; Tail risk
Issue:version 13 december 2013
Page Number:57
First Page:1
Last Page:52
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:C Mathematical and Quantitative Methods / C1 Econometric and Statistical Methods: General / C16 Specific Distributions
C Mathematical and Quantitative Methods / C6 Mathematical Methods and Programming / C61 Optimization Techniques; Programming Models; Dynamic Analysis
Licence (German):License LogoDeutsches Urheberrecht