A zero-risk weight channel of sovereign risk spillovers

Karolin Kirschenmann, Josef Korte and Sascha Steffen

Journal of Financial Stability, 2020, vol. 51, issue C

Abstract: European banks are exposed to a substantial amount of risky sovereign debt. “Missing capital” in the banking system resulting from the zero-risk weight exemption for European sovereign debt amplifies the co-movement between sovereign CDS spreads and facilitates cross-border crisis spillovers. Risks spill over from risky peripheral sovereigns to safer core countries, but not in the opposite direction nor for exposures to countries not exempted from risk-weighting. Unfunded non-domestic sovereign bond exposures primarily affect CDS spreads of non-GIIPS banks, while domestic sovereign-to-bank linkages are particularly important for GIIPS banks. Spillovers are attenuated when banks fund their sovereign bond exposures with capital.

Keywords: Sovereign debt; Sovereign risk; Bank risk; CDS; Contagion; Zero risk weight; Basel III; CRD; EBA capital exercise (search for similar items in EconPapers)
JEL-codes: F23 G01 G14 G15 G21 G28 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:51:y:2020:i:c:s1572308920300796

DOI: 10.1016/j.jfs.2020.100780

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