What determines bank CDS spreads? Evidence from European and US banks

- We examine the determinants of CDS for a sample of European and US banks.
- Leverage, asset quality, funding stability, and bank size are key balance sheet determinants.
- Equity returns, the term structure, and bank-specific and sovereign risk are key market determinants.
- Balance sheet determinants dominate market determinants for all banks.

We examine the determinants of CDS spreads for a sample of European and US banks. The key balance sheet determinants are leverage, asset quality, funding stability, and bank size, and the key market determinants are equity returns, the term structure of interest rates and bank-specific and host country sovereign credit risk. Our results would appear to confirm the applicability of Merton (1974)-type models extended to include market variables to the understanding of bank credit risk.

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