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Begin New Search Topic European Union Author Ricardo Correa

1. The Systemic Risk of European Banks

Author:
Lamont Black, Ricardo Correa, Xu Huang, and Hao Zhou
Publication Date:
07-2013
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We propose a hypothetical distress insurance premium (DIP) as a measure of the European banking systemic risk, which integrates the characteristics of bank size, default probability, and interconnectedness. Based on this measure, the systemic risk of European banks reached its height in late 2011 around E 500 billion. We find that the sovereign default spread is the factor driving this heightened risk in the banking sector during the European debt crisis. The methodology can also be used to identify the individual contributions of over 50 major European banks to the systemic risk measure. This approach captures the large contribution of a number of systemically important European banks, but Italian and Spanish banks as a group have notably increased their systemic importance. We also find that bank-specific fundamentals predict the one-year-ahead systemic risk contribution of our sample of banks in an economically meaningful way.
Topic:
Debt, Regional Cooperation, European Union, Regulation, Risk, Fiscal Policy, and Banking
Political Geography:
Europe

2. Liquidity Shocks, Dollar Funding Costs, and the Bank Lending Channel During the European Sovereign Crisis

Author:
Ricardo Correa, Horacio Sapriza, and Andrei Zlate
Publication Date:
11-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper documents a new type of cross-border bank lending channel. The deepening of the European sovereign debt crisis in 2011 restrained the financial intermediation of European banks in the United States. In this period, some of the U.S. branches of European banks faced a dollar liquidity shock—due to their perceived risk reflecting the sovereign risk of their countries of origin—which in turn affected the branches’ lending to U.S. entities. We use a novel dataset to analyze the operations of branches of foreign banks in the United States. Our results show that: (1) The U.S. branches of European banks experienced a run on their deposits, mainly from U.S. money market funds. (2) The branches with curtailed access to large time deposits relied more on funding from their own parent institutions, thus shifting from being net suppliers to being net receivers of dollar funding from their related offices. (3) Since the additional funding received from parent institutions was not enough to offset the decreased access to U.S. funding, such branches reduced their lending to U.S. entities.
Topic:
Regional Cooperation, European Union, Finance, Banking, and Liquidity
Political Geography:
Europe