Sovereign Risk Spillover Effects and the Role of Systemically Important Financial Institutions: Evidence from the European Debt Crisis

Haoshen Hu, Jörg Prokop and Hans-Michael Trautwein
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Haoshen Hu: University of Oldenburg
Jörg Prokop: University of Oldenburg - Finance and Banking; ZenTra - Center for Transnational Studies

No 69 / 2016, ZenTra Working Papers in Transnational Studies from ZenTra - Center for Transnational Studies

Abstract: We analyse two-way spillover effects between sovereign ratings and bank ratings across 17 Eurozone countries for the period 2002-2013. We show that sovereign rating actions including watchlist placements and outlooks have a significant impact on bank ratings. During the financial crisis, downgrade spillovers from sovereigns to systematically important financial institutions (SIFIs) are stronger than spillovers to non-SIFIs. Moreover, we provide evidence on the existence of a bank-to-sovereign rating transmission channel. Downgrades of SIFIs increase the probability of multiple-notch downgrades of sovereign ratings. Dividing the sample into PIIGS and non-PIIGS subsets, we find bank-to-sovereign spillovers to exist only in the PIIGS subsample.

Keywords: bank rating; sovereign rating; two-way spillover effect; European sovereign debt crisis (search for similar items in EconPapers)
JEL-codes: F36 G15 G24 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2016-11, Revised 2016-11
New Economics Papers: this item is included in nep-cba and nep-eec
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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2874725 First version, 2016 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:zen:wpaper:69

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