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Distance to Default and the Financial Crisis

Author

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  • Alistair Milne

    (School of Business and Economics, Loughborough University, UK)

Abstract
This paper analyses contingent-claims based measures of distance to default (D2D) for the 41 largest global banking institutions over the period 2006H2 to 20011H2. D2D falls from end-2006 through to end-2008. Cross-sectional differences in D2D prior to the crisis do not predict either bank failure or bank share prices decline, but D2D measured in mid-2008 does have some predictive value for failure by end-year. The ‘option value’ of the bank safety net remains small except at the height of the crisis and there is little indication of bank shareholders consciously using the safety net to shift risk onto taxpayers. (99 words)

Suggested Citation

  • Alistair Milne, 2013. "Distance to Default and the Financial Crisis," Discussion Paper Series 2013_03, Department of Economics, Loughborough University, revised Jun 2013.
    • Handle: RePEc:lbo:lbowps:2013_03
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    File URL: http://www.lboro.ac.uk/departments/sbe/RePEc/lbo/lbowps/Milne_WP2013_03.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    bank default; bank moral hazard; bank regulation; bank safety net; contingent claims; early warning systems; global financial crisis; market-based risk measurement; systemic risk; risk shiftingCreation-Date: 110613;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F54 - International Economics - - International Relations, National Security, and International Political Economy - - - Colonialism; Imperialism; Postcolonialism
    • P33 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid

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