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Sovereign debt exposures and banking risks in the current EU financial crisis

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  • Arnold, Ivo J.M.

Abstract

This paper explores the relationship between sovereign risk and banking risk during the European sovereign debt crisis in May 2010. We link banks’ stock returns and CDS rates to sovereign CDS rates, to examine the spillover of sovereign risk to the banking system in the EU. More specifically, we use sovereign debt exposures from the EU's July 2010 stress tests to investigate whether heavily exposed banks were hit harder during the May 2010 crisis. The results are mixed. Banks exposed to distressed sovereign debt respond more strongly to changes in sovereign CDS rates. On closer examination, however, this result appears to be driven by banks which are located in countries experiencing sovereign debt problems.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 34 (2012)
Issue (Month): 6 ()
Pages: 906-920

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Handle: RePEc:eee:jpolmo:v:34:y:2012:i:6:p:906-920

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Web page: http://www.elsevier.com/locate/inca/505735

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Keywords: Sovereign debt; Credit crisis; Euro area; Banking;

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References

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  1. Marco Buti & Sylvester Eijffinger & Daniele Franco, 2003. "Revisiting the Stability and Growth Pact: grand design or internal adjustment?," European Economy - Economic Papers 180, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  2. Ivo J. M. Arnold & Jan J.G. Lemmen, 1999. "The Vulnerability of Banks to Government default risk in the EMU," FMG Special Papers sp115, Financial Markets Group.
  3. Rafael La Porta & Florencio Lopez-deSilanes & Andrei Shleifer, 2000. "Government Ownership of Banks," Harvard Institute of Economic Research Working Papers 1890, Harvard - Institute of Economic Research.
  4. Arnold, Ivo J. M., 2007. "Financial stability in the Eurozone: where do we stand?," Journal of Financial Transformation, Capco Institute, vol. 19, pages 65-79.
  5. Barry Eichengreen & Charles Wyplosz, 1998. "The Stability Pact: more than a minor nuisance?," Economic Policy, CEPR & CES & MSH, vol. 13(26), pages 65-113, 04.
  6. Adrian Blundell-Wignall & Patrick Slovik, 2010. "The EU Stress Test and Sovereign Debt Exposures," OECD Working Papers on Finance, Insurance and Private Pensions 4, OECD Publishing.
  7. World Bank, 2001. "Finance for Growth : Policy Choices in a Volatile World," World Bank Publications, The World Bank, number 13895, October.
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Cited by:
  1. 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.
  2. Irfan Akbar Kazi & Mohamed Mehanaoui & Farhan Akbar, 2014. "The shift-contagion effect of global financial crisis and the European debt crisis on OECD Countries," Working Papers 2014-128, Department of Research, Ipag Business School.
  3. Dean, James W. & Muchova, Eva & Lisy, Jan, 2013. "How Slovakia has kept the confidence fairy," Journal of Policy Modeling, Elsevier, vol. 35(4), pages 487-503.

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