Determinants of bank risk behaviour in EMU countries

ABSTRACT

This article investigates the determinants of banking sector risk behaviour in EMU countries over the period 2004Q4–2013Q3. Average ‘Distance-to-default (DtD)’ based on all publicly listed banks headquartered in a particular country is used as an indicator of banking risk. Macroeconomic fundamentals, market sentiments and gross debt-to-GDP together with private debt are considered as factors explaining risk behaviour. Using a panel framework, I found that the market sentiments, debt-to-GDP ratio and nonfinancial institutions debt significantly affect banking sector fragility.

KEYWORDS:

• Distance-to-default
• bank risk

JEL CLASSIFICATION:

• G13
• G21

Acknowledgement

I thank Marta Gómez-Puig and Simón Sosvilla-Rivero for insightful comments.

Notes

¹ I consider ten countries which are in European Economic and Monetary Union from the beginning (except Luxembourg) and Greece which joined in 2002.

² I consider three panel regression methods: The fixed-effects (FE), the random effects (RE) and the pooled-OLS. To determine the empirical relevance of the potential methods, I use several statistic tests. I test FE versus RE using the Hausman test statistic for noncorrelation between the unobserved effect and the regressors. Between pooled-OLS and RE; I use Breusch and Pagan (1980)’s Lagrange multiplier test for the presence of an unobserved effect. Finally, I use the F-test for fixed effects to test whether all unobservable individual effects are zero to discriminate between pooled-OLS and RE.

Additional information

Funding

This work is supported by the Government of Spain and FEDER [grant number ECO2013-48326].