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Is sovereign risk related to the banking sector?

Author

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  • Aktug, R. Erdem
  • Nayar, Nandkumar (Nandu)
  • Vasconcellos, Geraldo M.

Abstract

We examine whether the banking sector within a nation is related to sovereign risk. We hypothesize that more competitive and sophisticated financial systems are less prone to panics or bank runs, and consequently will be associated with superior sovereign credit ratings. Using Ordered Probit with Aggregate Time Effects methodology, our results show that banking sector characteristics such as concentration in the banking system, liquidity of bank assets, and size of financial system are significantly related to sovereign credit ratings. Since the use of these sovereign ratings is ubiquitous in international finance in varied applications such as determination of the cost of international borrowing by governments, international cost of capital for FDI, and others, the relationships identified in this paper have important public policy implications.

Suggested Citation

  • Aktug, R. Erdem & Nayar, Nandkumar (Nandu) & Vasconcellos, Geraldo M., 2013. "Is sovereign risk related to the banking sector?," Global Finance Journal, Elsevier, vol. 24(3), pages 222-249.
  • Handle: RePEc:eee:glofin:v:24:y:2013:i:3:p:222-249
    DOI: 10.1016/j.gfj.2013.10.001
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    Cited by:

    1. Jan Bruha & Evžen Kocenda, 2017. "Financial Stability in Europe: Banking and Sovereign Risk," CESifo Working Paper Series 6453, CESifo Group Munich.
    2. Broto, Carmen & Molina, Luis, 2016. "Sovereign ratings and their asymmetric response to fundamentals," Journal of Economic Behavior & Organization, Elsevier, vol. 130(C), pages 206-224.
    3. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    4. repec:eee:glofin:v:36:y:2018:i:c:p:1-13 is not listed on IDEAS

    More about this item

    Keywords

    G100; G150; G180; Sovereign credit ratings; Banking; Competition; Liquidity;

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