On the relationship between bank CDS spreads and balance sheet indicators of bank risk

The study investigates whether there is a relationship between CDS spreads and balance sheet indicators of bank risk profile. Our analysis confirms the presence of a strong link between the dynamics of CDS spreads in the banking sector and the bank’s economic and financial performance and therefore highlights the need to pay more attention to the behavior of bank CDS spreads. This would enable regulators and authorities to use CDS spreads as an Early Warning Signal (EWS) of potential problems in the banking system to identify in advance sign of crisis in the banking sector and to avoid the consequences of further financial turmoil undermining the overall stability of the banking system.