Contingent Liabilities and Sovereign Risk: Evidence from Banking Sectors

Serkan Arslanalp and Yin Liao ()

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: This paper proposes a simple method to estimate contingent liabilities that arise from (implicit and explicit) government guarantees to the banking sector. This method allows us to construct cross-country estimates on potential costs of bank failures. Furthermore, we empirically test whether the contingent liabilities from the banking sector is a significant determinant of sovereign risk based on the data from 32 countries. Our results suggest that a 1% of GDP increase in contingent liabilities is associated with an increase in sovereign CDS spreads of 24 basis points in advanced countries and 75 basis points in emerging economies.

Keywords: Contingent Liabilities; Sovereign Risk; Banking Sector (search for similar items in EconPapers)
JEL-codes: G13 G21 G38 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2013-07
New Economics Papers: this item is included in nep-cba and nep-eec
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2013-43

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