Is the Central and Eastern European banking systems stable? Evidence from the recent financial crisis

Karkowska, Renata (2014): Is the Central and Eastern European banking systems stable? Evidence from the recent financial crisis.

Abstract

Systemic risk is a very important but very complex notion in banking and how to measure it adequately is challenging. We introduce a new framework for measuring systemic risk by using a risk-adjusted balance sheet approach. The measure models credit risk of banks as a put option on bank assets, a tradition that originated with Merton. We conceive of an individual bank’s systemic risk as its contribution to the potential sector-wide net. In this regard, the analysis of public commercial banks operating in 7 countries from Central and Eastern Europe, shows potential risk which could threaten all the financial system. The paper 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 study finds also instability of systemic risk determinants.

• Item Type: MPRA Paper
• Language: English
• Keywords: systemic risk, banking system, instability, emerging markets, Merton option model
• Subjects: A - General Economics and Teaching > A1 - General Economics > A10 - General; C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy ; Liquidation

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