Systemic Risk in Central and Eastern European Banking and its Determinants. Merton Option Model Approach.

Abstract

Last crisis and instability of financial markets caused considerable interest within public and academic community in measuring and management systemic risk. This article introduces a new framework for measuring systemic risk by using a risk-adjusted balance sheet approach. In this regard, the analysis of 21 largest commercial banks operating in 7 countries from Central and Eastern Europe, shows potential risk which could threaten all the financial system. The paper concludes new directions for measuring systemic risk by using Merton option model. It shows how risk management tools can be applied in new ways to measure and analyze systemic risk in European banking system. The research results is a systemic risk map for the CEE banking systems. The survey finds also instability risk determinants.