International Economics

<< N°137

Issue Q1 2014  
Solvency vs. liquidity. A decomposition of European banks' credit risk over the business cycle  
Guillaume Vuillemey
This paper provides evidence for the procyclicality of banks' credit risk by investigating the historical resilience of several European banking sectors before and after the 2008 banking crisis. It provides a decomposition of banks' probabilities of default between a solvency and a liquidity component. The results show a gradual build-up of fragilities before 2008 in most countries. Increased probabilities of default are shown to be mainly driven by a surge in liquidity risk, even when shocks of relatively low magnitude are imposed on the system. Abstract

Solvency ; Liquidity ; Global games ; Banking crises ; Procyclicality ; Keywords
G21 ; G17 ; JEL classification
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