CDS spreads are often seen as the 'leading' market based, default risk measure.

There is no popular alternative to CDS spreads except perhaps for the distance-to-

default (D2D) measure based on Merton (1974), which comes very close to it. In

this paper, we investigate the correlation and short-term dynamics between these

two measures for large European banks with a data panel spanning from 1/2006 to

12/2013. The analysis makes use of conventional Granger causality test statistics

for individual banks and for the whole panel data. As regards the results, we

found that the lead-lag relationship between these highly related variables varies

over time, over dierent banks, and over economic regimes. The lead of D2D

is signi cantly stronger for smaller banks, banks in problem countries (PIIGS),

after global nancial crises, during market turmoil, and for banks with poor credit

quality indicated by a high CDS spread. These results and the fact that D2D can

be calculated for every bank quoted on the stock exchange suggests that D2D is a

promising alternative to the CDS spread in default risk assessment of banks.