The Vulnerability of Banks to Government Default Risk in the EMU
This paper examines the vulnerability of banks in EMU countries to shocks to default risk premiums on public debt. This vulnerability depends on the total amount of public debt in bank portfolios, the degree of geographical diversification of public debt holdings by banks, and the extent to which the default risk of EMU governments is diversifiable. We calculate the effect of country-specific default shocks on the public debt portfolios of banks. The calculations are based on data of public debt positions at the aggregate banking sector level and take into account the historical covariance structure of default risk premiums in the EMU. We compare the following scenarios. First, we calculate the effect on the standard deviation of the capital-to-assets ratio if banks continue to hold mainly domestic public debt. Next, we calculate this effect if banks diversify their investments in public debt. We find that the standard deviation of the capital-to-assets ratio can decline considerably if banks diversify their public debt holdings. We close with some implications for prudential regulation. Copyright 2001 by Blackwell Publishers Ltd.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 4 (2001)
Issue (Month): 1 (Spring)
|Contact details of provider:|| Web page: http://www.blackwellpublishing.com/journal.asp?ref=1367-0271|
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=1367-0271|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jan J.G. Lemmen & Charles A.E. Goodhart, 1999. "Credit Risks and European Government Bond Markets: A Panel Data Econometric Analysis," Eastern Economic Journal, Eastern Economic Association, vol. 25(1), pages 77-107, Winter.
- Nouriel Roubini & Jeffrey Sachs, 1989. "Government Spending and Budget Deficits in the Industrial Economies," NBER Working Papers 2919, National Bureau of Economic Research, Inc.
- Ivo Arnold, 1999. "The third leg of the stool: Financial stability as a prerequisite for EMU," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 135(2), pages 280-305, June.
- Giovannini, Alberto & Piga, Gustavo, 1992. "Understanding the High Interest Rates on Italian Government Securities," CEPR Discussion Papers 720, C.E.P.R. Discussion Papers.
- Favero, Carlo A & Giavazzi, Francesco & Spaventa, Luigi, 1997.
"High Yields: The Spread on German Interest Rates,"
Royal Economic Society, vol. 107(443), pages 956-985, July.
- Carlo Ambrogio Favero & Francesco Giavazzi & Luigi Spaventa, "undated". "High Yielders: the Spread on German Interest Rates," Working Papers 102, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Carlo Favero & Francesco Giavazzi & Luigi Spaventa, 1996. "High Yields: The Spread on German Interest Rates," NBER Working Papers 5408, National Bureau of Economic Research, Inc.
- Favero, Carlo A. & Giavazzi, Francesco & Spaventa, Luigi, 1996. "High Yields: The Spread on German Interest Rates," CEPR Discussion Papers 1330, C.E.P.R. Discussion Papers.
- Jan J.G. Lemmen, 1999. "Managing Government Default Risk in Federal States," FMG Special Papers sp116, Financial Markets Group. Full references (including those not matched with items on IDEAS)