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The rise of sovereign credit risk: implications for financial stability

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  • Michael Davies
  • Tim Ng

Abstract

The financial crisis and economic recession, and policymakers' responses to these events, have raised sovereign risk concerns in a number of advanced economies. This has increased the cost and reduced the stability of funding for banks. It has also meant that decisions about the maturity of government debt have become important to the dynamics of systemic financial distress. This article looks at the financial stability issues involved, drawing from two recent studies by the Committee on the Global Financial System (CGFS). A return to sustainable government finances over the medium term is fundamental to managing current difficulties. Banks improving their funding and asset risk management, lengthening of government debt maturities and sound banking regulation are also important. And the different policy agencies involved need to ensure that they are aware of each other's objectives and operational plans, while maintaining clear lines of accountability.

Suggested Citation

  • Michael Davies & Tim Ng, 2011. "The rise of sovereign credit risk: implications for financial stability," BIS Quarterly Review, Bank for International Settlements, September.
    • Handle: RePEc:bis:bisqtr:1109g
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    References listed on IDEAS

    as
    1. Patrick Bolton & Olivier Jeanne, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(2), pages 162-194, June.
    2. Claudio Borio & Anna Zabai, 2018. "Unconventional monetary policies: a re-appraisal," Chapters, in: Peter Conti-Brown & Rosa M. Lastra (ed.), Research Handbook on Central Banking, chapter 20, pages 398-444, Edward Elgar Publishing.
    3. Robert N McCauley & Kazuo Ueda, 2009. "Government debt management at low interest rates," BIS Quarterly Review, Bank for International Settlements, June.
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    Citations

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    Cited by:

    1. Philip Turner, 2011. "Is the long-term interest rate a policy victim, a policy variable or a policy lodestar?," BIS Working Papers 367, Bank for International Settlements.
    2. repec:hal:spmain:info:hdl:2441/4s2r6d8kua98d9veu2un1vm9vh is not listed on IDEAS
    3. Balli, Faruk & Basher, Syed Abul & Balli, Hatice Ozer, 2013. "International income risk-sharing and the global financial crisis of 2008–2009," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2303-2313.
    4. Mink, Mark & de Haan, Jakob, 2013. "Contagion during the Greek sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 102-113.
    5. repec:spo:wpmain:info:hdl:2441/4s2r6d8kua98d9veu2un1vm9vh is not listed on IDEAS
    6. Jéfferson Colombo & Peter Wanke & Jorge Antunes & Abul Kalam Azad, 2022. "Unveiling endogeneity between competition and efficiency in European banks: a robust econometric-neural network approach," SN Business & Economics, Springer, vol. 2(3), pages 1-46, March.
    7. Xavier Timbeau, 2015. "A diverging Europe on the edge. The independent Annual Growth Survey 2015," Post-Print hal-03620048, HAL.
    8. 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.
    9. Lidija Lovreta & Joaquín López Pascual, 2020. "Structural breaks in the interaction between bank and sovereign default risk," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 11(4), pages 531-559, December.
    10. Céline Antonin & Christophe Blot & Amel Falah & Sabine Le Bayon & Hervé Péléraux & Christine Rifflart & Xavier Timbeau & Catherine Mathieu & Mathieu Plane, 2014. "Le piège de la déflation," Post-Print hal-01093020, HAL.
    11. Ramos-Francia, Manuel & Garcia-Verdu, Santiago, 2018. "Is trouble brewing for emerging market economies? An empirical analysis of emerging market economies’ bond flows," Journal of Financial Stability, Elsevier, vol. 35(C), pages 172-191.
    12. Nouy, D., 2012. "Is sovereign risk properly addressedby financial regulation?," Financial Stability Review, Banque de France, issue 16, pages 95-106, April.
    13. Mink, Mark & de Haan, Jakob, 2013. "Contagion during the Greek sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 34(C), pages 102-113.
    14. Jakob Eberl & Christopher Weber, 2014. "ECB Collateral Criteria: A Narrative Database 2001–2013," ifo Working Paper Series 174, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    15. 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.
    16. repec:spo:wpmain:info:hdl:2441/3rkj9m8cf38o9o48pft8q9gd65 is not listed on IDEAS
    17. repec:hal:spmain:info:hdl:2441/3rkj9m8cf38o9o48pft8q9gd65 is not listed on IDEAS
    18. Nedelcu Monica Letitia, 2013. "The Liquidity of the Financial System and the Sovereign Debt Crisis in Europe – Is There a Solution?," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(1), pages 238-243, May.
    19. Jakob Korbinian Eberl, 2016. "The Collateral Framework of the Eurosystem and Its Fiscal Implications," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 69.
    20. Andrew Powell, 2012. "The World of Forking Paths: Latin America and the Caribbean Facing Global Economic Risks," Research Department Publications 4766, Inter-American Development Bank, Research Department.
    21. Talam, Camilla & Kiemo, Samuel, 2024. "Interest rate risk in Kenya: The banking sector stability and fiscal risks nexus," KBA Centre for Research on Financial Markets and Policy Working Paper Series 80, Kenya Bankers Association (KBA).
    22. 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.
    23. repec:mth:ijafr8:v:8:y:2018:i:4:p:115-138 is not listed on IDEAS
    24. Buschmann, Christian & Schmaltz, Christian, 2017. "Sovereign collateral as a Trojan Horse: Why do we need an LCR+," Journal of Financial Stability, Elsevier, vol. 33(C), pages 311-330.

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    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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