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How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices

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  • Heather D. Gibson
  • Stephen G. Hall
  • George S. Tavlas

Abstract

We quantify the linkages among banks’ equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a long-run recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks. Our results also point to the importance of using levels of equity prices -- rather than rates of return -- in measuring banks’ performance. The use of levels allows us to derive the determinants of long-run equity prices.

Suggested Citation

  • Heather D. Gibson & Stephen G. Hall & George S. Tavlas, 2014. "How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices," Discussion Papers in Economics 14/17, Division of Economics, School of Business, University of Leicester.
  • Handle: RePEc:lec:leecon:14/17
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    References listed on IDEAS

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    Cited by:

    1. Mittal, Amit & Garg, Ajay Kumar, 2021. "Bank stocks inform higher growth—A System GMM analysis of ten emerging markets in Asia," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 210-220.
    2. Anastasiou, Dimitrios, 2020. "Senior bank loan officers' expectations for loan demand: Evidence from the Euro-area," MPRA Paper 98903, University Library of Munich, Germany.
    3. Dimitris Anastasiou & Panayotis Kapopoulos & Kalliopi-Maria Zekente, 2023. "Sentimental Shocks and House Prices," The Journal of Real Estate Finance and Economics, Springer, vol. 67(4), pages 627-655, November.
    4. Mittal, Amit & Garg, Ajay Kumar, 2018. "Bank stocks inform higher growth – A System GMM analysis of ten emerging markets in Asia," MPRA Paper 98253, University Library of Munich, Germany.
    5. Fiordelisi, Franco & Girardone, Claudia & Minnucci, Federica & Ricci, Ornella, 2020. "On the nexus between sovereign risk and banking crises," Journal of Corporate Finance, Elsevier, vol. 65(C).
    6. George S. Tavlas, 2016. "New Perspectives on the Great Depression: A Review Essay," International Finance, Wiley Blackwell, vol. 19(3), pages 353-374, December.
    7. Gibson, Heather D. & Hall, Stephen G. & Tavlas, George S., 2017. "Self-fulfilling dynamics: The interactions of sovereign spreads, sovereign ratings and bank ratings during the euro financial crisis," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 371-385.
    8. Anastasiou, Dimitrios & Bragoudakis, Zacharias & Giannoulakis, Stelios, 2021. "Perceived vs actual financial crisis and bank credit standards: Is there any indication of self-fulfilling prophecy?," Research in International Business and Finance, Elsevier, vol. 58(C).
    9. Malliaropulos, Dimitris & Migiakis, Petros, 2018. "The re-pricing of sovereign risks following the Global Financial Crisis," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 39-56.
    10. Keddad, Benjamin & Schalck, Christophe, 2020. "Evaluating sovereign risk spillovers on domestic banks during the European debt crisis," Economic Modelling, Elsevier, vol. 88(C), pages 356-375.

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    More about this item

    Keywords

    euro-area financial crisis; sovereign-bank linkages; banks’ performance; banking stability;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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