Credit Spead Interdependencies of European States and Banks during the Financial Crisis

Adrian Alter and Yves Schüler

No 2011-24, Working Paper Series of the Department of Economics, University of Konstanz from Department of Economics, University of Konstanz

Abstract: We investigate the interdependence of the default risk of several Eurozone countries (France, Germany, Italy, Ireland, Netherlands, Portugal, Spain) and their domestic banks during the period June 2007 - May 2010, using daily credit default swaps (CDS). Bank bailout programs changed the composition of both banks’ and sovereign balance sheets and, moreover, affected the linkage between the default risk of governments and their local banks. Our main findings suggest that in the period before bank bailouts the contagion disperses from bank credit spreads into the sovereign CDS market. After bailouts, a financial sector shock affects more strongly sovereign CDS spreads in the short-run, however, the impact becomes insignificant at a long horizon. Furthermore, government CDS spreads become an important determinant of banks’ CDS series. The interdependence of government and bank credit risk is heterogeneous across countries, but homogeneous within the same country.

Keywords: CDS; private-to-public risk transfer; bank bailout; generalized impulse responses (search for similar items in EconPapers)
JEL-codes: C58 G01 G18 G21 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2011-01-13
New Economics Papers: this item is included in nep-ban, nep-eec and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Credit spread interdependencies of European states and banks during the financial crisis (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:knz:dpteco:1124

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