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Bank to sovereign risk spillovers across borders: evidence from the ECB’s Comprehensive Assessment

Johannes Breckenfelder and Bernd Schwaab

No 2193, Working Paper Series from European Central Bank

Abstract: We study spillovers from bank to sovereign risk in the euro area using difference specifications around the European Central Bank’s release of stress test results for 130 significant banks on October 26, 2014. We document that following this information release bank equity prices in stressed countries declined. Surprisingly, bank risk in stressed countries was not absorbed by their sovereigns but spilled over to non-stressed euro area sovereigns. As a result, in non-stressed countries, the co-movement between sovereign and bank risk increased. This suggests that market participants perceived that bank risk is shared within the euro area. JEL Classification: C68, F34

Keywords: bank-sovereign nexus; Comprehensive Assessment; European Central Bank; risk spillovers; stress test (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-eec
Date: 2018-11
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