nep-ban New Economics Papers
on Banking
Issue of 2015‒10‒04
four papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. The relationship between distance-to-default and CDS spreads as measures of default risk for European banks By Kim Ristolainen
  2. On the roles of different foreign currencies in European bank lending By Krogstrup, Signe; Tille, Cédric
  3. The Interaction between Funding Liquidity and Market Liquidity: Evidence from Subprime and European Crises By Azusa Takeyama; Naoshi Tsuchida
  4. Disclosure, banks CDS spreads and the European sovereign crisis By Hervé ALEXANDRE; François GUILLEMIN; Catherine Refait-Alexandre

  1. By: Kim Ristolainen (Department of Economics, University of Turku)
    Abstract: CDS spreads are often used as market’s view of credit risk. There is no popular alternative to it; perhaps only the distance-to-default measure based on Merton (1974) comes close to it. In this paper we investigate the relationship between these two measures for large European banks in post subprime crises era. The analysis makes use of conventional Granger causality test statistics for individual banks and for the whole panel data. As for the results, we find that the lead-lag relationship between these variables varies over time and over different banks and economic regimes. The lead of distance-to-default is stronger for banks in problem countries (PIGS), during European debt crises, for relatively small banks and when there are large changes in CDS spread. These results suggest that we may have predictive power by not only using the CDS spread, but also other measures such as the distance-to-default.
    Keywords: financial stability, European banks, distance-to-default, credit default swap, lead-lag relationship
    JEL: G01 G14 G21 G32 G33
    Date: 2015–09
  2. By: Krogstrup, Signe; Tille, Cédric
    Abstract: We draw on a new data set on the use of Swiss francs and other currencies by European banks to assess the patterns of foreign currency bank lending. We show that the patterns differ sharply across foreign currencies. The Swiss franc is used predominantly for lending to residents, especially households. It is sensitive to the interest rate differential, exchange rate developments, funding availability, and to some extent international trade. Lending in other currencies is more used in lending to resident nonfinancial firms, and mostly in cross-border lending, where it is sensitive to funding costs and trade. Policy measures aimed at foreign currency lending have a clear impact on lending to residents. Our analysis shows that not all foreign currencies are alike, and that any policy aimed at the use of foreign currencies needs to take this heterogeneity into account.
    Keywords: cross-border transmission of shocks; foreign currency lending; Swiss franc lending
    JEL: F32 F34 F36
    Date: 2015–09
  3. By: Azusa Takeyama (Director and Senior Economist, Institute for Monetary and Economic Studies (currently Financial System and Bank Examination Department), Bank of Japan (E-mail:; Naoshi Tsuchida (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper explores the interaction between funding liquidity and market liquidity. The simultaneous reduction of funding and market liquidities is often observed during financial crises. While Brunnermeier and Pedersen (2009) argue that fragility of liquidity is due to a destabilizing effect of margin calls triggered by uninformed traders' behavior under uncertainty, Nyborg and Östberg (2014) claim that the malfunction in interbank funding markets causes declines in market liquidity in broader financial markets. We demonstrate that Nyborg and Östberg's cause was dominant during the subprime financial crisis, while both causes were valid during the European sovereign debt crisis using a structural vector autoregression model.
    Keywords: Funding Liquidity, Market Liquidity, Limits of Arbitrage
    JEL: G01 G14 G21
    Date: 2015–09
  4. By: Hervé ALEXANDRE (DRM Finance, Université Paris Dauphine); François GUILLEMIN (CRESE, Univ. Bourgogne Franche-Comté); Catherine Refait-Alexandre (CRESE, Univ. Bourgogne Franche-Comté)
    Abstract: We investigate the impact of banks disclosure on the evolution of their CDS spreads during the European sovereign crisis. The disclosure of information help investors in building expectations so disclosure may participate into the reduction of the information risk premium and reduces CDS spread. We analyze the CDS spread changes following the announcement of sovereign credit rating downgrades. We consider 16 dates in the period 2011-2013 and for each one, we assess the cumulative abnormal CDS spread change (CASC). We build two disclosure indexes: one general and one specifically dedicated to sovereign exposure.We show that the bank exposure to sovereign risk has a positive impact on the CASC. Disclosure about sovereign exposure has a negative impact on CASC showing that information reduce risk premiums. However, the global disclosure increases the CASC; investors may disapprove the disclosure of too much abundant and broad information.
    Keywords: bank, sovereign crisis, disclosure, CDS
    JEL: G14 G21
    Date: 2015–09

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