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Default Intensity and Expected Recovery of Japanese Banks and "Government": New Evidence from the CDS Market

March 2006
Yoichi Ueno*1
Naohiko Baba*2

Abstract

Using term structure data of Credit Default Swap (CDS) spreads for the four Japanese mega-banks and the government, we jointly estimate the default intensity and expected recovery (loss) given a default. In doing so, we attempt to further identify the difference in the expected recovery ratios between senior and subordinated CDS contracts. Estimation results are summarized as follows. (i) The default intensities for the banks and the government substantially rose in times of a banking crisis since the late 1990s. (ii) The expected recovery ratios for subordinated CDS contracts are significantly smaller than those for senior CDS contracts, ranging from 46 to 85 percent of those for senior CDSs, depending on the banks. (iii) Each bank's default intensity is significantly cointegrated with, and reacts to, the Japanese government's default intensity. This result implies that a systemic risk factor among Japanese major banks is closely related to the default intensity of the Japanese government.

Key Words:
Credit Default Swap, Japanese Banks, Sovereign CDS, Subordinated CDS, Loss Given Default

JEL Classifications: G12, G21

  1. *1The authors greatly benefited from discussions with Ken Singleton, Takatoshi Ito, Kimie Harada, and Yuko Kawai, among others. We also thank GFI Limited in collecting CDS data. Any remaining errors are solely ours. The views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Japan.
  2. *2Senior Economist and Director, Institute for Monetary and Economic Studies and Financial Markets Department, Bank of Japan
    e-mail: naohiko.baba@boj.or.jp

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