Bank credit risk and sovereign debt exposure: Moral hazard or hedging?

Laura Baselga-Pascual, Lidia Loban and Emma-Riikka Myllymäki ()
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Emma-Riikka Myllymäki: Audencia Business School

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Abstract: This study investigates the relationship between credit risk and bank exposure to sovereign debt. Using an international dataset of commercial banks from 2002 to 2022, we apply various regressions and panel data models to address potential endogeneity issues. Our results reveal that banks with higher levels of impaired loans tend to hold more sovereign debt. Furthermore, we observe that this relationship is stronger in countries with high sovereign credit ratings. This suggests that banks, when confronted with elevated credit risk from impaired loans, may seek safety in sovereign debt as a seemingly secure investment.

Keywords: Financial institutions; Bank risk; Sovereign debt nexus; Credit risk (search for similar items in EconPapers)
Date: 2025-01
Note: View the original document on HAL open archive server: https://hal.science/hal-05585256v1
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Published in Finance Research Letters, 2025, 71, pp.106454. ⟨10.1016/j.frl.2024.106454⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05585256

DOI: 10.1016/j.frl.2024.106454

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