Is the Central and Eastern European Banking Systems Stable? Evidence from the Recent Financial Crisis
Is the Central and Eastern European Banking Systems Stable? Evidence from the Recent Financial Crisis

Author(s): Renata Karkowska
Subject(s): Economy, Supranational / Global Economy, Business Economy / Management, Financial Markets
Published by: ASERS Publishing
Keywords: systemic risk; banking system; instability; emerging markets; Merton option model
Summary/Abstract: Systemic risk is a very important but very complex notion in banking and how to measure it adequately is challenging. We introduce a new framework for measuring systemic risk by using a risk-adjusted balance sheet approach. The measure models credit risk of banks as a put option on bank assets, a tradition that originated with Merton model. We conceive of an individual bank’s systemic risk as its contribution to the potential sector-wide net. In this regard, the analysis of public commercial banks operating in 7 countries from Central and Eastern Europe, show potential risk which could threaten all the financial system. The chapter shows how risk management tools can be applied in new ways to measure and analyze systemic risk in European banking system. The research results are a systemic risk map for the CEE banking systems. The study finds also instability of systemic risk determinants.

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