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Are banks affected by their holdings of government debt?

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  • Chiara Angeloni
  • Guntram B. Wolff

Abstract

The strong relation between sovereign and banking stress is frequently emphasised, especially since the start of the European sovereign debt crisis. This working paper sheds light on the determinants of the link. It studies the stock market performance and the holdings of government debt of the banks stress tested by the European Banking Authority in July and December 2011. A number of results stand out: Banksâ?? holdings of the sovereign bonds of vulnerable countries generally decreased during the period December 2010 to September 2011. The average stock market performance of each countryâ??s banks was very uneven during 2011. The long-term refinancing operation (LTRO) had no material effect on banksâ?? stock market values. Greek debt holdings had an effect on banksâ?? market values in the period July to October 2011 while after October this effect disappeared. Holdings of Italian and Irish debt had a material effect on banksâ?? market value in the period October to December 2011. Holdings of debt of other periphery countries, in particular Spain, were not an issue. The July PSI deal did not substantially affect the risk resulting from holdings of debt other than Greek debt. The location of banks matters for their market value. This highlights the need to form a banking union in the euroarea.

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Bibliographic Info

Paper provided by Bruegel in its series Working Papers with number 717.

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Date of creation: Mar 2012
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Handle: RePEc:bre:wpaper:717

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  1. Anna Iara & Guntram B. Wolff, 2011. "Rules and risk in the euro area," Working Papers 615, Bruegel.
  2. Reinhart, Carmen & Rogoff, Kenneth, 2009. "The Aftermath of Financial Crises," CEPR Discussion Papers 7209, C.E.P.R. Discussion Papers.
  3. Benedicta Marzinotto & André Sapir & Guntram B. Wolff, 2011. "What kind of fiscal union?," Policy Briefs 646, Bruegel.
  4. Patrick Bolton & Olivier Jeanne, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," IMF Economic Review, Palgrave Macmillan, vol. 59(2), pages 162-194, June.
  5. Reinhart, Carmen M. & Rogoff, Kenneth S., 2009. "The Aftermath of Financial Crises," Scholarly Articles 11129155, Harvard University Department of Economics.
  6. Silvia Merler & Jean Pisani-Ferry, 2012. "Who's afraid of sovereign bonds?," Policy Contributions 695, Bruegel.
  7. Acharya, Viral V & Drechsler, Itamar & Schnabl, Philipp, 2011. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," CEPR Discussion Papers 8679, C.E.P.R. Discussion Papers.
  8. Ejsing, Jacob & Lemke, Wolfgang, 2011. "The Janus-headed salvation: Sovereign and bank credit risk premia during 2008-2009," Economics Letters, Elsevier, vol. 110(1), pages 28-31, January.
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Cited by:
  1. Bicu, Andreea & Candelon, Bertrand, 2013. "On the importance of indirect banking vulnerabilities in the Eurozone," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5007-5024.
  2. 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.
  3. Niccolò Battistini & Marco Pagano & Saverio Simonelli, 2013. "Systemic Risk, Sovereign Yields and Bank Exposures in the Euro Crisis," CSEF Working Papers 345, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  4. Milutin Ješić, 2013. "Implications of Fiscal Irresponsibility on Financial Stability," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 2(3), pages 111-138.
  5. De Bruyckere, Valerie & Gerhardt, Maria & Schepens, Glenn & Vander Vennet, Rudi, 2013. "Bank/sovereign risk spillovers in the European debt crisis," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4793-4809.
  6. repec:cbk:journl:v:2:y:2013:i:2:p:111-138 is not listed on IDEAS

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