How much of bank credit risk is sovereign risk? Evidence from the eurozone

Junye Li () and Gabriele Zinna
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Junye Li: ESSEC Business School

No 990, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We develop a multivariate credit risk model for the term structures of sovereign and bank credit default swaps. First, we separate the probability of joint defaults of large Eurozone sovereigns (systemic risk) from that of sovereign-specific defaults (country risk). Then, we quantify individual banks' exposures to each type of sovereign risk, as well as bank-specific credit risk. Banks� sovereign risk exposures vary with banks� size, their holdings of sovereign debt, and expected government support. On average, 45% of French and Spanish banks' credit risk consists in sovereign risk, compared with only 30% for Italian and 23% for German banks. Furthermore, short- to medium-term contracts are particularly informative on sovereign systemic risk.

Keywords: Sovereign and Bank Credit Risk; Credit Default Swaps; Distress Risk Premia; Bayesian Estimation. (search for similar items in EconPapers)
JEL-codes: F34 G12 G15 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-ban, nep-eec and nep-rmg
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_990_14

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