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Large EU banks' capital and liquidity: Relationship and impact on credit default swap spreads

Sclip, Alex and Girardone, Claudia and Miani, Stefano (2018) 'Large EU banks' capital and liquidity: Relationship and impact on credit default swap spreads.' British Accounting Review. ISSN 0890-8389

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Abstract

This paper explores the interrelations between bank capital and liquidity and their impact on the market probability of default. We employ an unbalanced panel of large European banks with listed credit default swap (CDS) contracts during the period 2005-2015, which allow us to consider the impact of the recent financial crisis. Our evidence suggests that bank capital and funding liquidity risk as defined in Basel III have an economically meaningful bidirectional relationship. However, the effect on CDS spread is ambiguous. While capital appears to have a relatively large impact on CDS spread changes, liquidity risk is priced only when it falls below the regulatory threshold.

Item Type: Article
Uncontrolled Keywords: EU Banks; Capital; Liquidity; Credit Default Swaps (CDS); Financial Crisis.
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Elements
Date Deposited: 09 Oct 2018 10:50
Last Modified: 17 Oct 2018 11:15
URI: http://repository.essex.ac.uk/id/eprint/23216

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