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Bank/sovereign risk spillovers in the European debt crisis

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  • De Bruyckere, Valerie
  • Gerhardt, Maria
  • Schepens, Glenn
  • Vander Vennet, Rudi
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    Abstract

    This paper investigates contagion between bank and sovereign default risk in Europe over the period 2007–2012. We define contagion as excess correlation, i.e. correlation between banks and sovereigns over and above what is explained by common factors, using CDS spreads at the bank and at the sovereign level. Moreover, we investigate the determinants of contagion by analyzing bank-specific as well as country-specific variables and their interaction. Using the EBA’s disclosure of sovereign exposures of banks, we provide empirical evidence that three contagion channels are at work: a guarantee channel, an asset holdings channel and a collateral channel. We find that banks with a weak capital buffer, a weak funding structure and less traditional banking activities are particularly vulnerable to risk spillovers. At the country level, the debt ratio is the most important driver of contagion. Furthermore, the impact of government interventions on contagion depends on the type of intervention, with outright capital injections being the most effective measure in reducing spillover intensity.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 37 (2013)
    Issue (Month): 12 ()
    Pages: 4793-4809

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    Handle: RePEc:eee:jbfina:v:37:y:2013:i:12:p:4793-4809

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Contagion; Bank risk; Sovereign risk; Bank business models; Bank regulation; Sovereign debt crisis;

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    Cited by:
    1. Avino, Davide & Cotter, John, 2014. "Sovereign and bank CDS spreads: two sides of the same coin?," MPRA Paper 55208, University Library of Munich, Germany.
    2. Jean-Pierre Allegret & Hélène Raymond & Houda Rharrabti, 2014. "The impact of the global and eurozone crises on European banks stocks Some evidence of shift contagion," EconomiX Working Papers 2014-24, University of Paris West - Nanterre la Défense, EconomiX.
    3. John Cotter & Davide Avino, 2014. "Sovereign and bank CDS spreads: two sides of the same coin?," Working Papers 201402, Geary Institute, University College Dublin.
    4. Thomas Conlon & John Cotter, 2014. "Anatomy of a Bail-In," Papers 1403.7628, arXiv.org.
    5. Ivo Arnold & Saskia van Ewijk, 2014. "The impact of sovereign and credit risk on interest rate convergence in the euro area," DNB Working Papers 425, Netherlands Central Bank, Research Department.

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