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Contingent Liabilities and Sovereign Risk: Evidence from Banking Sectors

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  • Serkan Arslanalp
  • Yin Liao
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Abstract

This paper proposes a simple method to estimate contingent liabilities that arise from (implicit and explicit) government guarantees to the banking sector. This method allows us to construct cross-country estimates on potential costs of bank failures. Furthermore, we empirically test whether the contingent liabilities from the banking sector is a significant determinant of sovereign risk based on the data from 32 countries. Our results suggest that a 1% of GDP increase in contingent liabilities is associated with an increase in sovereign CDS spreads of 24 basis points in advanced countries and 75 basis points in emerging economies

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File URL: http://cama.crawford.anu.edu.au/pdf/working-papers/2013/432013.pdf
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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2013-43.

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Length: 52 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:een:camaaa:2013-43

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Keywords: Contingent Liabilities; Sovereign Risk; Banking Sector;

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  1. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 473-500, June.
  2. Dale F. Gray & Elena Loukoianova & Samuel W. Malone & Cheng Hoon Lim, 2008. "A Risk-Based Debt Sustainability Framework," IMF Working Papers, International Monetary Fund 08/40, International Monetary Fund.
  3. Glenn Hoggarth & Ricardo Reis & Victoria Saporta, 2001. "Costs of banking system instability: some empirical evidence," Bank of England working papers, Bank of England 144, Bank of England.
  4. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, American Finance Association, vol. 29(2), pages 449-70, May.
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Cited by:
  1. Corsetti, Giancarlo & Kuester, Keith & Meier, André & Müller, Gernot, 2013. "Sovereign risk and belief-driven fluctuations in the euro area," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9723, C.E.P.R. Discussion Papers.
  2. Bodie, Zvi & Brière, Marie, 2013. "Sovereign Wealth and Risk Management. A New Framework for Optimal Asset Allocation of Sovereign Wealth," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/7874, Paris Dauphine University.

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