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BRRD credibility and the bank-sovereign nexus

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Listed:
  • Martien Lamers
  • Thomas Present
  • Rudi Vander Vennet
  • Nicolas Soenen

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.

Suggested Citation

  • Martien Lamers & Thomas Present & Rudi Vander Vennet & Nicolas Soenen, 2021. "BRRD credibility and the bank-sovereign nexus," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 21/1024, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:21/1024
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    File URL: http://wps-feb.ugent.be/Papers/wp_21_1024.pdf
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    References listed on IDEAS

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    Cited by:

    1. Li, Shanshan & Lu, Liping, 2023. "No-bailout event and local bank-government nexus in China," International Review of Financial Analysis, Elsevier, vol. 89(C).
    2. Marta Gómez-Puig & Simón Sosvilla-Rivero, 2024. "The diabolic loop between sovereign and banking risk in the euro area," IREA Working Papers 202406, University of Barcelona, Research Institute of Applied Economics, revised Feb 2024.

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    More about this item

    Keywords

    BRRD; Bank-sovereign nexus; CDS spread; Dynamic correlation; DCC-MIDAS;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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