Bank/sovereign risk spillovers in the European debt crisis

Valerie De Bruyckere (), Maria Gerhardt (), Glenn Schepens and Rudi Vander Vennet
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Valerie De Bruyckere: Ghent University, Department of Financial Economics
Maria Gerhardt: Ghent University, Department of Financial Economics

No 232, Working Paper Research from National Bank of Belgium

Abstract: This paper investigates contagion between bank risk and sovereign risk in Europe over the period 2006-2011. Since this period covers various stages of the banking and sovereign crisis, it offers a fertile ground to analyze bank/sovereign risk spillovers. We define contagion as excess correlation, i.e. correlation between banks and sovereigns over and above what is explained by common factors, using CDS spreads at the bank and at the sovereign level. Moreover, we investigate the determinants of contagion by analyzing bank-specific as well as country-specific variables and their interaction. We provide empirical evidence that various contagion channels are at work, including a strong home bias in bank bond portfolios, using the EBA’s disclosure of sovereign exposures of banks. We find that banks with a weak capital and/or funding position are particularly vulnerable to risk spillovers. At the country level, the debt ratio is the most important driver of contagion.

Keywords: Contagion; bank risk; sovereign risk; bank business models; bank regulation; sovereign debt crisis (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 H6 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2012-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

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Related works:
Journal Article: Bank/sovereign risk spillovers in the European debt crisis (2013)
Working Paper: Bank/sovereign risk spillovers in the European debt crisis (2012)
Working Paper: Bank/sovereign Risk Spillovers in the European Debt Crisis (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:201210-232

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