Determinants of Bank Default Risk During the Covid-19 Pandemic

We study four groups of determinants of bank credit default swap (CDS) spreads in the COVID-19 pandemic: 1) the COVID-19 cases and deaths in measuring the shock of the pandemic; 2) aggressive monetary and fiscal policy ;3) bank balance-sheet variables ; 4) market condition variables. We confirm that growth in the COVID cases and deaths significantly widens banks’ CDS spreads. Expansionary monetary policy relieves the adverse effect of theCOVID-19 shock. Expansionary fiscal policy broadens banks’ CDS spreads. Inflation worsens banks’ default risk, and this effect amplifies as the COVID-19 cases and deaths increase.