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.
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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 (Citation1980)’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.