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The co-movement between sovereign and bank credit risk during the financial crisis: the case of the Euro Area

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  • Federico Nucera

    ()
    (Prometeia Spa, CASMEF Luiss Guido Carli, Rimini Center for Economic Analysis)

Abstract

We investigate the comovement between sovereign and bank credit riskin the Euro area over the period 2008-2010. We construct two synthetic credit risk measures of the European sovereign and banking sectors thatcan be used for macro-prudential supervision. We estimate a Vector error-correction model and we obtain empirical evidence of a cointegration relationship between sovereign and bank credit risk. Moreover, we find that deviations from this equilibrium relationship are adjusted throughthe banking sector. Finally, impulse response functions show that it is possible to distinguish between a permanent sovereign shock and a transitory banking shock.

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Bibliographic Info

Article provided by Istituto di Cultura Bancaria Francesco Parrillo in its journal Rivista Bancaria - Minerva Bancaria.

Volume (Year): (2012)
Issue (Month): 6 (December)
Pages:

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Handle: RePEc:rvs:bancar:12_6_1

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Keywords: financial stability; sovereign sector credit risk; banking sector credit risk; nth-to-default CDS; portfolio credit risk management;

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