End of the sovereign-bank doom loop in the European Union? The Bank Recovery and Resolution Directive

Giovanni Covi and Ulrich Eydam

Journal of Evolutionary Economics, 2020, vol. 30, issue 1, No 2, 5-30

Abstract: Abstract In this paper we examine the relationship between the default risk of banks and sovereigns, i.e. the ‘doom-loop’. Specifically, we try to assess the effectiveness of the implementation of the new recovery and resolution framework in the European Union. We use a panel with daily data on European banks and sovereigns ranging from 2012 to 2016 in order to test the effects of the Bank Recovery and Resolution Directive on the two-way feedback process. We find that there was a pronounced feedback loop between banks and sovereigns from 2012 to 2014. However, after the implementation of the European Banking Union, in 2015/2016, the magnitude of the doom-loop decreased and the spillovers became not statistically significant. Furthermore, our results suggest that the implementation of the new resolution framework is a suitable candidate to explain this finding. Overall, the results are robust across several specifications.

Keywords: Financial stability; Sovereign bail-out; Bail-in tool; Doom loop; European Banking Union; Bank Recovery and Resolution Directive (search for similar items in EconPapers)
JEL-codes: E44 E58 G01 G18 G21 G28 L51 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s00191-018-0576-2

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