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On Bank Credit Risk: Systemic or Bank Specific? Evidence for the United States and United Kingdom

Published online by Cambridge University Press:  08 April 2015

Junye Li  and
Gabriele Zinna
Junye Li
Affiliation:
li@essec.edu, ESSEC Business School, 100 Victoria St, 13-02 National Library, Singapore 188064, Singapore
Gabriele Zinna
Affiliation:
gabriele.zinna@esterni.bancaditalia.it, Bank of Italy, Via Nazionale 91, 00184 Roma, Italy.
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Abstract

We develop a multivariate credit risk model that accounts for joint defaults of banks and allows us to disentangle how much of banks’ credit risk is systemic. We find that the United States and United Kingdom differ not only in the evolution of systemic risk but, in particular, in their banks’ systemic exposures. In both countries, however, systemic credit risk varies substantially, represents about half of total bank credit risk on average, and induces high risk premia. The results suggest that sovereign and bank systemic risk are particularly interlinked in the United Kingdom.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 5-6 , December 2014 , pp. 1403 - 1442
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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