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Bank/sovereign risk spillovers in the European debt crisis

Valerie De Bruyckere, Maria Gerhardt, Glenn Schepens and Rudi Vander Vennet ()

Journal of Banking & Finance, 2013, vol. 37, issue 12, 4793-4809

Abstract: This paper investigates contagion between bank and sovereign default risk in Europe over the period 2007–2012. We define contagion as excess correlation, i.e. correlation between banks and sovereigns over and above what is explained by common factors, using CDS spreads at the bank and at the sovereign level. Moreover, we investigate the determinants of contagion by analyzing bank-specific as well as country-specific variables and their interaction. Using the EBA’s disclosure of sovereign exposures of banks, we provide empirical evidence that three contagion channels are at work: a guarantee channel, an asset holdings channel and a collateral channel. We find that banks with a weak capital buffer, a weak funding structure and less traditional banking activities are particularly vulnerable to risk spillovers. At the country level, the debt ratio is the most important driver of contagion. Furthermore, the impact of government interventions on contagion depends on the type of intervention, with outright capital injections being the most effective measure in reducing spillover intensity.

Keywords: Contagion; Bank risk; Sovereign risk; Bank business models; Bank regulation; Sovereign debt crisis (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 H6 (search for similar items in EconPapers)
Date: 2013
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Working Paper: Bank/sovereign risk spillovers in the European debt crisis (2012) Downloads
Working Paper: Bank/sovereign risk spillovers in the European debt crisis (2012) Downloads
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