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Sovereign and Financial-Sector Risk: Measurement and Interactions


  • Dale F. Gray

    (Monetary and Capital Markets Department, International Monetary Fund, Washington, DC 20431)

  • Samuel W. Malone

    (School of Management, University of the Andes, Bogotá, Colombia)


The complex spillover effects between sectors observed during the global financial crisis and recent European crisis make clear the importance of improving our understanding of the interactions and feedback mechanisms between sovereign and banking-sector risks. To that end, this paper presents a conceptual framework for analyzing the sovereign, banks, and their interlinkages based on contingent claims analysis (CCA). Our bank-by-bank framework uses balance-sheet data plus high-frequency market data in a way that measures risk exposures and can capture key risk transmission and feedbacks with the sovereign in real time. Risk transmission between banks and sovereigns can arise in the framework from several important sources: (a) bank holdings of risky sovereign debt, (b) explicit and implicit guarantees from sovereigns to banks, and (c) spillovers from sovereign spreads into bank borrowing costs. We illustrate the framework with several examples and ways forward to analyze multicountry sovereign and banking interactions.

Suggested Citation

  • Dale F. Gray & Samuel W. Malone, 2012. "Sovereign and Financial-Sector Risk: Measurement and Interactions," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 297-312, October.
  • Handle: RePEc:anr:refeco:v:4:y:2012:p:297-312

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    Cited by:

    1. Jose E. Gomez-Gonzalez & Jorge M. Uribe & Oscar M. Valencia, 2023. "Risk spillovers between global corporations and Latin American sovereigns: global factors matter," Applied Economics, Taylor & Francis Journals, vol. 55(13), pages 1477-1496, March.
    2. Oleg Deev & Martin Hodula, 2016. "Sovereign default risk and state-owned bank fragility in emerging markets: evidence from China and Russia," Post-Communist Economies, Taylor & Francis Journals, vol. 28(2), pages 232-248, April.
    3. María Cantero Sáiz & Sergio Sanfilippo Azofra & Begoña Torre Olmo, 2019. "The single supervision mechanism and contagion between bank and sovereign risk," Journal of Regulatory Economics, Springer, vol. 55(1), pages 67-106, February.
    4. Robert C. Merton, 2014. "ADB's Distinguished Speakers Program Measuring the Connectedness of the Financial System: Implications for Risk Management," Asian Development Review, MIT Press, vol. 31(1), pages 186-210, March.
    5. Mr. Dale F Gray, 2013. "Modeling Banking, Sovereign, and Macro Risk in a CCA Global VAR," IMF Working Papers 2013/218, International Monetary Fund.
    6. Cantero-Saiz, Maria & Sanfilippo-Azofra, Sergio & Torre-Olmo, Begoña & López-Gutiérrez, Carlos, 2014. "Sovereign risk and the bank lending channel in Europe," Journal of International Money and Finance, Elsevier, vol. 47(C), pages 1-20.
    7. María Cantero‐Saiz & Sergio Sanfilippo‐Azofra & Begoña Torre‐Olmo, 2022. "Sovereign Risk and the Bank Lending Channel: Differences across Countries and the Effects of the Financial Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(1), pages 285-312, February.

    More about this item


    systemic risk; contingent claims analysis;

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages


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