The bank-sovereign nexus: Evidence from a non-bailout episode

Massimiliano Caporin, Gisle Natvik, Francesco Ravazzolo and Paolo Santucci de Magistris

Journal of Empirical Finance, 2019, vol. 53, issue C, 181-196

Abstract: We explore the interplay between sovereign and bank credit risk in a setting where Danish authorities first let two Danish banks default and then left the country’s largest bank, Danske Bank, to recapitalize privately. We find that the correlation between bank and sovereign credit default swap (CDS) rates changed with these events. Following the non-bailout events, the sensitivity to external shocks, proxied by CDS rates on the European banking sector, declined both for Danske Bank and for Danish sovereign debt. After Danske Bank’s recapitalization, its exposure to the European banking sector reappeared while that did not happen for Danish sovereign debt. The decoupling between CDS rates on sovereign and private bank debt indicates that the vicious feedback loop between bank and sovereign risk weakened after the non-bailout policies were introduced.

Keywords: Bailout expectation; Risk; CDS; Spillover; Quantile regression (search for similar items in EconPapers)
JEL-codes: C21 G12 G21 G28 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927539819300568
Full text for ScienceDirect subscribers only

Related works:
Working Paper: The Bank-Sovereign Nexus: Evidence from a non-Bailout Episode (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:53:y:2019:i:c:p:181-196

DOI: 10.1016/j.jempfin.2019.07.001

Access Statistics for this article

Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

More articles in Journal of Empirical Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().