Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/88710
Authors: 
Radev, Deyan
Year of Publication: 
2013
Series/Report no.: 
SAFE Working Paper Series 37
Abstract: 
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.
Subjects: 
Sovereign debt
Sovereign default
Financial distress
Systemic risk
Contagion
Banking stability
Tail risk
JEL: 
C16
C61
G01
G21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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