A journey through the capital structure of the banking sector: Empirical evidence for Europe from 2008 to 2012

Systemic risk is the protagonist of the recent financial crisis. This thesis proposes a definition and a propagation mechanism for systemic risk. Risk management has a direct linkage with capital management, when addressing the question that the risk handled by a financial institution is compatible with the amount of equity available. This thesis proposes a risk management of liquid market variables, which compose the assets of a bank, based on the statistical tool of PCA. The principal component analysis will define the PCR, or Principal Components of Risk. Such definition of Risk will be adopted to test if the risk represented by PCR is explanatory of the movements of equity and/or debt for the banks included in the in the index Itraxx financial senior: the results of these regressions will be compared with a formal Capital Adequacy test in order to assess the financial soundness of the main financial European institutions.This thesis also proposes a reading of financial CDS as influenced by the variables explanatory of liquidity existing in a financial system: the first part of the thesis explores such linkage in the period 2008-2012