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Bank/sovereign risk spillovers in the European debt crisis

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  • V. DE BRUYCKERE

    ()

  • M. GERHARDT
  • G. SCHEPENS
  • R. VANDER VENNET

Abstract

This paper investigates contagion between bank risk and sovereign risk in Europe over the period 2006-2011. We define contagion as excess correlation, i.e. correlation between banks and sovereigns over and above what is explained by common factors, using CDS spreads at the bank and at the sovereign level. Moreover, we investigate the determinants of contagion by analyzing bank-specific as well as country-specific variables and their interaction. We provide empirical evidence that various contagion channels are at work, including a strong home bias in bank bond portfolios, using the EBA’s disclosure of sovereign exposures of banks. We find that banks with a weak capital and/or funding position are particularly vulnerable to risk spillovers. At the country level, the debt ratio is the most important driver of contagion.

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Bibliographic Info

Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 12/828.

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Length: 48 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:rug:rugwps:12/828

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Keywords: Contagion; bank risk; sovereign risk; bank business models; bank regulation; sovereign debt crisis;

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Citations

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Cited by:
  1. Alter, Adrian & Beyer, Andreas, 2013. "The dynamics of spillover effects during the European sovereign debt crisis," Working Paper Series 1558, European Central Bank.
  2. Avino, Davide & Cotter, John, 2014. "Sovereign and bank CDS spreads: two sides of the same coin?," MPRA Paper 55208, University Library of Munich, Germany.
  3. Alter, Adrian & Beyer, Andreas, 2014. "The dynamics of spillover effects during the European sovereign debt turmoil," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 134-153.
  4. John Cotter & Davide Avino, 2014. "Sovereign and bank CDS spreads: two sides of the same coin?," Working Papers 201402, Geary Institute, University College Dublin.
  5. Beetsma, Roel & de Jong, Frank & Giuliodori, Massimo & Widijanto, Daniel, 2014. "The Impact of News and the SMP on Realized (Co)Variances in the Eurozone Sovereign Debt Market," CEPR Discussion Papers 9803, C.E.P.R. Discussion Papers.
  6. Jean-Pierre Allegret & Hélène Raymond & Houda Rharrabti, 2014. "The impact of the global and eurozone crises on European banks stocks Some evidence of shift contagion," EconomiX Working Papers 2014-24, University of Paris West - Nanterre la Défense, EconomiX.
  7. 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.
  8. Matteo Falagiarda & Stefan Reitz, 2013. "Announcements of ECB Unconventional Programs: Implications for the Sovereign Risk of Italy," Kiel Working Papers 1866, Kiel Institute for the World Economy.
  9. Thomas Conlon & John Cotter, 2014. "Anatomy of a Bail-In," Papers 1403.7628, arXiv.org.
  10. Dennis Bonam & Jasper Lukkezen, 2013. "Government spending shocks, sovereign risk and the exchange rate regime," Working Papers 14-01, Utrecht School of Economics.

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