Sovereign risk spill-overs in the banking sectors of Central America and the Caribbean

Dorian M. Noel, Prosper Bangwayo-Skeete, Michael Brei and Justin Robinson

Journal of International Financial Markets, Institutions and Money, 2021, vol. 73, issue C

Abstract: This paper examines the relationship between sovereign credit ratings and bank stability in Central America and the Caribbean (CAC). We use data on 177 banks from 24 countries for the period 1999–2014 and find that sovereign rating downgrades precede deterioration in bank stability. The finding highlights the importance of understanding the transmission channels and the amplification of sovereign risk spill-overs. With respect to the former, we found evidence to support both the “balance sheet exposure” and “asset valuation adjustments” arguments found in the literature. Concerning the latter, the sovereign risk spill-overs are more intense in countries with low foreign currency reserves, limited financial transparency and weak central bank independence. Our findings support the argument that banks are vulnerable to the aggravation of sovereign risk concerns and thus, the zero risk weight to sovereigns should be reviewed.

Keywords: Caribbean; Central America; Bank Stability; Sovereign Risk Spill-over (search for similar items in EconPapers)
JEL-codes: E44 G01 G21 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:73:y:2021:i:c:s1042443121000986

DOI: 10.1016/j.intfin.2021.101379

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