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The Janus-headed salvation: sovereign and bank credit risk premia during 2008-09

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  • Ejsing, Jacob
  • Lemke, Wolfgang

Abstract

As the global banking crisis intensified in the fall of 2008, governments announced comprehensive rescue packages for financial institutions. In this paper, we put the joint response of euro area bank and sovereign CDS premia under the microscope. We find that the bank rescue packages led to a clear structural break in these premia's comovement, which had been rather tight and stable in the weeks preceding the in-tensification of the crisis. Firstly, the packages induced a decrease in risk spreads for banks at the expense of a marked increase in risk spreads for governments. Secondly, we show that in addition to this one-off jump in the levels of CDS spreads, the packages strongly increased the sensitivity of sovereign risk spreads to any further aggravation of the crisis. At the same time, the sensitivity of bank credit risk premia declined and became more sovereign-like, reflecting the extensive government guarantees of banking sector liabilities. JEL Classification: G15, G21

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1127.

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Date of creation: Dec 2009
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Handle: RePEc:ecb:ecbwps:20091127

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Keywords: credit default swaps; financial crisis; risk transfer;

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References

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  1. Edda Zoli & Silvia Sgherri, 2009. "Euro Area Sovereign Risk During the Crisis," IMF Working Papers 09/222, International Monetary Fund.
  2. Ashoka Mody, 2009. "From Bear Stearns to Anglo Irish," IMF Working Papers 09/108, International Monetary Fund.
  3. Carlo Favero & Marco Pagano & Ernst-Ludwig von Thadden, 2007. "How Does Liquidity Affect Government Bond Yields?," Working Papers 323, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  4. Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2004. "Sovereign risk premia in the European government bond market," Working Paper Series, European Central Bank 0369, European Central Bank.
  5. Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2006. "Flight-to-Quality or Flight-to-Liquidity? Evidence From the Euro-Area Bond Market," NBER Working Papers 12376, National Bureau of Economic Research, Inc.
  6. Lorenzo Codogno & Carlo Favero & Alessandro Missale, 2003. "Yield spreads on EMU government bonds," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 18(37), pages 503-532, October.
  7. Salvador Barrios & Per Iversen & Magdalena Lewandowska & Ralph Setzer, 2009. "Determinants of intra-euro area government bond spreads during the financial crisis," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 388, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  8. Manganelli, Simone & Wolswijk, Guido, 2007. "Market discipline, financial integration and fiscal rules: what drives spreads in the euro area government bond market?," Working Paper Series, European Central Bank 0745, European Central Bank.
  9. Alois Geyer & Stephan Kossmeier & Stefan Pichler, 2004. "Measuring Systematic Risk in EMU Government Yield Spreads," Review of Finance, Springer, Springer, vol. 8(2), pages 171-197.
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Cited by:
  1. Edda Zoli & Silvia Sgherri, 2009. "Euro Area Sovereign Risk During the Crisis," IMF Working Papers 09/222, International Monetary Fund.
  2. Kalbaska, A. & Gątkowski, M., 2012. "Eurozone sovereign contagion: Evidence from the CDS market (2005–2010)," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 657-673.
  3. Dale F. Gray, 2013. "Modeling Banking, Sovereign, and Macro Risk in a CCA Global VAR," IMF Working Papers 13/218, International Monetary Fund.
  4. Viral V. Acharya & Itamar Drechsler & Philipp Schnabl, 2011. "A Pyrrhic Victory? - Bank Bailouts and Sovereign Credit Risk," NBER Working Papers 17136, National Bureau of Economic Research, Inc.
  5. Marta Gómez-Puig & Simón Sosvilla-Rivero, 2014. "Causality and contagion in EMU sovereign debt markets," Working Papers, Universitat de Barcelona, UB Riskcenter 2014-03, Universitat de Barcelona, UB Riskcenter.
  6. Herrmann, Sabine & Jochem, Axel, 2013. "Current account adjustment in EU countries: Does euro-area membership make a difference?," Discussion Papers 49/2013, Deutsche Bundesbank, Research Centre.
  7. Bolton, Patrick & Jeanne, Olivier, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," CEPR Discussion Papers 8358, C.E.P.R. Discussion Papers.
  8. Baglioni, Angelo & Cherubini, Umberto, 2013. "Within and between systemic country risk. Theory and evidence from the sovereign crisis in Europe," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(8), pages 1581-1597.
  9. Horvath, B.L. & Huizinga, H.P., 2011. "Does the European Financial Stability Facility bail out Sovereigns or Banks? An Event Study," Discussion Paper, Tilburg University, Center for Economic Research 2011-118, Tilburg University, Center for Economic Research.
  10. Chan-Lau, Jorge A. & Liu, Estelle X. & Schmittmann, Jochen M., 2013. "Equity returns in the banking sector in the wake of the great recession and the European sovereign debt crisis," Discussion Papers 32/2013, Deutsche Bundesbank, Research Centre.
  11. Angelo Baglioni & Umberto Cherubini, 2011. "Marking-to-Market Government Guarantees to Financial Systems.Theory and Evidence for Europe," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0103, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  12. Bank for International Settlements, 2011. "The impact of sovereign credit risk on bank funding conditions," CGFS Papers, Bank for International Settlements, number 43.
  13. Thomas Laubach, 2010. "Fiscal Policy and Interest Rates: The Role of Sovereign Default Risk," NBER Chapters, in: NBER International Seminar on Macroeconomics 2010, pages 7-29 National Bureau of Economic Research, Inc.
  14. Herrmann, Sabine & Kleinert, Jörn, 2014. "Lucas paradox and allocation puzzle: Is the euro area different?," Discussion Papers 06/2014, Deutsche Bundesbank, Research Centre.
  15. Patrick Augustin, 2012. "Sovereign Credit Default Swap Premia," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 12-10, New York University, Leonard N. Stern School of Business, Department of Economics.
  16. Damiano Sandri & Ashoka Mody, 2011. "The Eurozone Crisis," IMF Working Papers 11/269, International Monetary Fund.

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