How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices

Heather Gibson, Stephen G. Hall () and George Tavlas

No 15/25, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: We quantify the linkages among banks’ equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a long-run recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks’ equity-prices. Our results also point to the importance of using levels of equity prices -- rather than rates of return -- in measuring banks’ performance. The use of levels allows us to derive the determinants of long-run equity prices.

Keywords: euro-area financial crisis; sovereign-bank linkages; banks’ performance; banking stability. (search for similar items in EconPapers)
JEL-codes: E3 G01 G14 G21 (search for similar items in EconPapers)
Date: 2015-11
New Economics Papers: this item is included in nep-ban, nep-eec, nep-fmk and nep-mac
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Related works:
Journal Article: How the euro-area sovereign-debt crisis led to a collapse in bank equity prices (2016)
Working Paper: How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices (2015)
Working Paper: How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices (2014)
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