The European sovereign debt crisis has impaired many European banks. The distress on the European banks may transmit worldwide, and result in a large-scale knock-on default of financial institutions. This study presents a computer simulation model to analyze the risk of insolvency of banks and the consequent knock-on defaults in a bank credit network. Simulation experiments quantify the worst i...

In terms of regulatory and economic capital, credit risk is the most signi…cant risk faced by banks. We implement a credit risk model –based on publicly available information – with the aim of developing a tool to monitor credit risk in a sample of large and complex banking groups (LCBGs) in the EU. The results indicate varying credit risk pro…les across these LCBGs and over time. Furthermore, ...

Do credit market conditions affect corporate capital structures? In an attempt to answer this question, I study two natural experiments that affect corporate access to bank credit: the 1961 expansion of bank credit due to the emergence of the market for CDs, and the contraction associated with the 1966 credit crunch. I document several capital structure reactions to these changes in credit mark...

This study examines a troubling phenomenon occurring recently in several Latin American economies: a marked slowdown in bank credit to the private sector. Based on the study of five countries (Argentina, Bolivia, Colombia, Peru, and Mexico), we first document the magnitude of the problem, asking how severe and prolonged has the slowdown been and how this behavior compare with the past? Second, ...

This paper documents a negative cross-transmission of bank-idiosyncratic credit risk events to the equity value peers comprising other banks, insurance and real estate firms inter alia. Large jumps in idiosyncratic component bank CDS spreads significantly reduce peers, particularly on event day. The externality does not hinge “information connectedness” between two entities as proxied by charac...

The industrial organization approach to banking is extended to analyze the effects of interbank market activity and regulatory liquidity requirements on bank behavior. A multi-stage decision situation allows for considering the interaction between credit risk and liquidity risk of banks. This interaction is found to make a risk neutral bank behave as if it were risk averse in an environment whe...

We model the e ects on banks of the introduction of a market for credit derivatives; in particular, credit default swaps. A bank can use such swaps to temporarily transfer credit risks of their loans to others, reducing the likelihood that defaulting loans trigger the bank's nancial distress. Because credit derivatives are more exible at transferring risks than are other, more established tools...