Patrycja Chodnicka-Jaworska

Department of Financial System of Economy, Faculty of Management University of Warsaw

Poland

Email: pchodnicka@wz.uw.edu.pl

Fundamental determinants of credit default risk for European and American banks

Piotr Jaworski

Department of Financial System of Economy, Faculty of Management University of Warsaw

Poland

Email: pjaworski@wz.uw.edu.pl

Abstract. The aim of the paper is to identify the fundamental variables driving banks’ credit default swaps. Quarterly data from 2004 to 2015 for European and American banks have been used. The analysis has been prepared through static panel data models. The following hypothesis has been put forward: the earnings potential, and economic uncertainty significantly influence credit risk. The independent variables used are CAMELS factors – Capital Adequacy, Asset Quality, Management Quality, Earnings Potential, Liquidity, and Sensitivity to Market Risk. The CDS spreads are most sensitive to the market risk factors whereas capital adequacy, earnings and liquidity indicators have weaker impact.

Received: June, 2017

1st Revision: August, 2017

Accepted: October, 2017

DOI: 10.14254/2071-8330.2017/10-3/4

JEL Classification: C23, E51, G21

Keywords: CDS spreads, CAMELS, dynamic panel data models