Sovereign credit spreads, banking fragility, and global factors

Anusha Chari, Felipe Garcés, Juan Francisco Martínez and Patricio Valenzuela

Journal of Financial Stability, 2024, vol. 72, issue C

Abstract: This study explores the relationship between sovereign credit risk, banking fragility, and global financial factors in a large panel database of emerging market economies. To measure banking fragility, we construct a novel model-based semi-parametric metric (JLoss) that computes the expected joint loss of the banking sector in each country conditional on a country-level systemic event. Our metric of banking fragility is positively associated with sovereign credit spreads, after controlling for the standard determinants of sovereign credit risk, a comprehensive set of measures of systemic risk, and country and time fixed effects. The results additionally indicate that countries with more fragile banking sectors are more exposed to global (exogenous) financial factors than those with more resilient banking sectors. These findings underscore that regulators must ensure the stability of the banking sector to improve governments’ borrowing costs in international debt markets.

Keywords: Banks; Credit ratings; Credit risk; Emerging economies; Global factors (search for similar items in EconPapers)
JEL-codes: E43 E44 F30 G12 G15 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Sovereign Credit Spreads, Banking Fragility, and Global Factors (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:72:y:2024:i:c:s1572308924000202

DOI: 10.1016/j.jfs.2024.101235

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