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Sovereign debt holdings and banks’ credit risk: Evidence from the Eurozone

Isabel Abinzano, Pilar Corredor and José Manuel Mansilla-Fernández

Finance Research Letters, 2022, vol. 47, issue PA

Abstract: This paper investigates the direct effect of sovereign debt holding on banks’ credit risk. Using individual Eurozone listed banks’ information, we find that holding sovereign debt improves the level of banks’ credit risk, but this effect is reversed when the credit risk associated with such debt is taken into account. For this purpose, we consider three alternative sovereign debt holding proxies and two types of banks’ credit-risk measures, both forward- and backward-looking. We find that the transmission of credit risk from sovereign debt holdings to banks’ credit risk is only captured when forward-looking credit-risk measures, based on market data, are used.

Keywords: Bank credit-risk; Sovereign debt; Eurozone banks; Dynamic panel data (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 H63 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:47:y:2022:i:pa:s154461232100502x

DOI: 10.1016/j.frl.2021.102600

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