Linking Bank Crises and Sovereign Defaults: Evidence from Emerging Markets

Irina Balteanu () and Aitor Erce

Working Papers from European Stability Mechanism

Abstract: We analyze the mechanisms through which bank and sovereign distress feed into each other, using a large sample of emerging market economies over three decades. After defining “twin crises” as events where bank crises and sovereign defaults combine, and further distinguishing between those bank crises that end up in sovereign defaults and vice-versa, we study what differentiates “single” and “twin” events. Using an event analysis methodology, we document systematic differences between “single” and “twin” crises across various dimensions. We show that many of the regularities often associated with either “bank” or “debt” crises are present in twin events only. We further show that “twin” crises themselves are heterogeneous events: the proper time sequence of crises that compose “twin” episodes is important for understanding these events. Guided by these facts, we use discrete-variable econometric techniques to assess the main channels of distress transmission between crises. We find that balance sheet interconnections, credit dynamics, financial openness and economic growth are important drivers of twin crises. Our results inform the flourishing theoretical literature on the mechanisms surrounding feedback loops of sovereign and bank stress.

Keywords: Banking Crises; Sovereign Defaults; Feedback Loops; Balance Sheets (search for similar items in EconPapers)
JEL-codes: E44 F34 G01 H63 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2017-02-15
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published

Downloads: (external link)
https://www.esm.europa.eu/sites/default/files/document/wp22updated.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Journal Article: Linking Bank Crises and Sovereign Defaults: Evidence from Emerging Markets (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:stm:wpaper:22

Access Statistics for this paper

More papers in Working Papers from European Stability Mechanism Contact information at EDIRC.
Bibliographic data for series maintained by Karol SISKIND ().