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Financial sector linkages and the dynamics of bank and sovereign credit spreads

René Kallestrup, David Lando () and Agatha Murgoci

Journal of Empirical Finance, 2016, vol. 38, issue PA, 374-393

Abstract: We show that CDS premiums of sovereigns are significantly affected by the foreign exposures of their domestic banks. Our analysis uses a simple risk-weighted exposure measure which aggregates detailed data on the composition and risk of banks' foreign exposures. A 1 basis point change in our risk weighted exposure measure corresponds to an average change of approximately 0.4bp in sovereign CDS spreads. Extensive robustness checks confirm that the explanatory power of our measure is not due to common factors in CDS premiums. We also measure the size and riskiness of the sovereign's implicit and explicit guarantees extended to its domestic banking system.

Keywords: Credit risk; Banks; Sovereign risk (search for similar items in EconPapers)
JEL-codes: G01 G15 G21 (search for similar items in EconPapers)
Date: 2016
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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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Handle: RePEc:eee:empfin:v:38:y:2016:i:pa:p:374-393