Measuring systemic risk of the European banking sector

Last year’s European bank stress tests were faulty to say the least. For example, those tests failed to find problems with any of the Irish Banks that soon afterwards dragged Ireland into its current crisis. While the soon-to-be-released stress tests may do better, the previous shortcomings suggest that a broader, more transparent evaluation is needed. This column proposes a new way of assessing systemic risk using publicly available stock price data and financial statement information.

Steffen, Sascha (2011), Measuring systemic risk of the European banking sector,