CDS spreads and balance sheet ratios in the banking sector: an empirical analysis on the Mediterranean Europe

Abstract: The paper investigates empirically what kind of relationship between banking sector’s CDS spreads and balance sheet ratios has been established, in the Mediterranean Europe for the period 2009-2014.The study shows the attention of the market for the quality and profitability of banks’ assets, in order to evaluate credit risk. We also find a significant attention for shortterm liquidity, that could be explained by the Eurozone crisis that has affected the region in the period analyzed. Provided that also balance-sheet variables can be affected by balance-sheets’ policies, we finally suppose, that some results have been distorted by the deep speculation that took place in the CDS market of the Mediterranean Europe, during these years and has invalidated the efficiency of the CDS spread, as a good credit risk indicator.