Do information contagion and business model similarities explain bank credit risk commonalities?

Arbeitspapier

This paper revisits the credit spread puzzle for banks from the perspective of information contagion. The puzzle consists of two stylized facts: Structural determinants of credit risk not only have low explanatory power but also fail to capture common factors in the residuals. We reproduce the puzzle for European bank credit spreads and hypothesize that the puzzle exists because structural models ignore contagion effects. We therefore extend the structural approach to include information contagion through bank business model similarities. To capture this channel, we propose an intuitive measure for portfolio overlap and apply it to the complete asset holdings of the largest banks in the Eurozone. Incorporating this unique network information into the structural model increases explanatory power and removes a systemic common factor from the residuals. Furthermore, neglecting the network likely overstates the importance of structural determinants.

Object Details

• ISBN: 978-92-9472-081-8
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ESRB Working Paper Series ; No. 94

Classification and Topics

• Classification: Wirtschaft ; Financial Crises ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Multiple or Simultaneous Equation Models: Panel Data Models; Spatio-temporal Models ; Multiple or Simultaneous Equation Models: Classification Methods; Cluster Analysis; Principal Components; Factor Models
• Subject: information contagion ; credit spread puzzle ; bank business model similarities ; portfolio overlap measure ; dynamic network effects model

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Wang, Dieter ; van Lelyveld, Iman ; Schaumburg, Julia
• Event: Veröffentlichung
• (who): European Systemic Risk Board (ESRB), European System of Financial Supervision
• (where): Frankfurt a. M.
• (when): 2019

Further information

• DOI: doi:10.2849/020080
• Handle: http://hdl.handle.net/10419/210869
• Last update: 10.03.2025, 11:44 AM CET