Systemic risk among European banks: A copula approach

Abstract

This paper investigates the drivers of systemic risk and contagion among European banks. First, we use copulas to estimate the systemic risk contribution and systemic risk sensitivity based on CDS spreads of European banks from 2005 to 2014. We then run panel regressions for our systemic risk measures using idiosyncratic bank characteristics and country control variables. Our results comprise highly significant drivers of systemic risk in the European banking sector and have important implications for bank regulation. We argue that banks which receive state aid and have risky loan portfolios as well as low amounts of available liquid funds contribute most to systemic risk, whereas relatively poorly equity equipped banks, mainly engaged in traditional commercial banking with strong ties to the local private sector, headquartered in highly indebted countries are most sensitive to systemic risk.