Recent evidence on the sovereign-bank nexus in the euro area

Paul Bochmann, Benedikt Kagerer and Cosimo Pancaro

Finance Research Letters, 2024, vol. 69, issue PB

Abstract: This paper estimates sovereign-bank default risk spillovers in the euro area. Spillovers spiked at the start of the COVID-19 pandemic and of the Russian invasion of Ukraine but remained contained during the March 2023 banking sector turmoil. Panel regressions find that higher banks’ sovereign exposures increase spillovers between the creditor bank and the borrowing sovereign. Countries with lower GDP growth, higher default probabilities, and a higher debt burden transmit more risk to banks. Larger, less capitalized and more funding-risk-exposed banks convey more default risk to sovereigns. Public aid to the financial sector reduces spillovers.

Keywords: Sovereign-bank nexus; Risk spillovers; Sovereign exposures (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:69:y:2024:i:pb:s1544612324011371

DOI: 10.1016/j.frl.2024.106108

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