The Systemic Risk Potential in European Banking – Evidence from Bivariate GARCH Models

This paper attempts to assess the Europe-wide systemic risk potential in banking. We employ a bivariate GARCH model to estimate conditional correlations between European bank stock indices. These correlations are used as an indication for the interdependencies amongst the banking business and hence for the systemic risk potential. We employ several tests to assess the development of the systemic risk potential. The results show that many of the conditional correlations exhibit an upward move in the last years. This is an indication that the economic factors determining the European banking business have become more similar and that the systemic risk potential has increased. JEL-Classification: G21, F34, G15