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BRRD credibility and the bank-sovereign nexus

Martien Lamers (), Thomas Present, Rudi Vander Vennet () and Nicolas Soenen ()

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: We investigate the effectiveness of the Bank Recovery and Resolution Directive (BRRD) in mitigating the bank-sovereign nexus in the Euro Area. Using CDS spreads to measure bank and sovereign credit risk and a DCC-MIDAS model capturing the long-term component of bank-sovereign interconnectedness, we document that the dynamic correlation between banks and sovereigns has decreased in Euro Area countries since the introduction of the BRRD. Panel data analysis reveals that the decline in interconnectedness is not driven by the banks’ capital adequacy, size or holdings of domestic sovereign securities.

Keywords: BRRD; Bank-sovereign nexus, CDS spread, Dynamic correlation, DCC-MIDAS (search for similar items in EconPapers)
JEL-codes: C58 G28 G32 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2021-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-isf
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:21/1024

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