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The aim of this paper is to verify whether and to which extent co-movements in EU banks’ risk, i.e. their degree of exposures of European banks to common shocks, have increased in time, following the completion of Monetary Union, the introduction of the euro and the process of European banking integration. To this end, we provide a measure of co-movements in bank risk by means of a dynamic factor model, which allows to decompose an indicator of bank fragility, the Distance-to-Default, into three main components: an EU-wide, a country-specific and a bank-level idiosyncratic component. Our results show the commonality in bank risk appears to have significantly increased since 1999, in particular if one concentrates on large banks. We also show that co-movements in EU banks’ fragility are only in part related to common macro shocks and that a banking system specific component at the EU-wide level appears relevant. This has obvious consequences in terms of systemic stability, but may also have far reaching policy implications with regards to the structuring of banking supervision in Europe

Item Type: MPRA Paper -

Institution: UniCredit Group-

Original Title: Banking integration and co-movements in EU banks’ fragility-

Language: English-

Keywords: Co-movements; dynamic factor models; distance-to-default; Systemic risk-

Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and EstimationG - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; MortgagesG - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets-

Autor: Vulpes, Giuseppe


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