The systemic risk of European banks during the financial and sovereign debt crises. Working Paper

This paper designs a systemic risk measure for the European banking system as a hypothetical distress insurance premium (DIP), which integrates economically the main characteristics of systemic risk—size, default probability, and interconnectedness. We further identify the individual contributions of 58 major European banks to the systemic risk measure. We find that the European banking systemic risk reached its height in late 2011 around €500 billion, and the sovereign default factor is the dominant driver for the European debt crisis. Our approach identifies a number of systemically important European banks, but smaller Italian and Spanish banks as groups have notably increased their systemic importance. Our findings provide support for the European-wide macroprudential regulation of banking systemic risk. JEL Classification G15, G21, G28