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Sovereign debt exposures and banking risks in the current EU financial crisis

  • Arnold, Ivo J.M.

This paper explores the relationship between sovereign risk and banking risk during the European sovereign debt crisis in May 2010. We link banks’ stock returns and CDS rates to sovereign CDS rates, to examine the spillover of sovereign risk to the banking system in the EU. More specifically, we use sovereign debt exposures from the EU's July 2010 stress tests to investigate whether heavily exposed banks were hit harder during the May 2010 crisis. The results are mixed. Banks exposed to distressed sovereign debt respond more strongly to changes in sovereign CDS rates. On closer examination, however, this result appears to be driven by banks which are located in countries experiencing sovereign debt problems.

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File URL: http://www.sciencedirect.com/science/article/pii/S0161893812000683
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Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 34 (2012)
Issue (Month): 6 ()
Pages: 906-920

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Handle: RePEc:eee:jpolmo:v:34:y:2012:i:6:p:906-920
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505735

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  1. Rafael La Porta & Florencio Lopezde-Silanes & Andrei Shleifer, 2000. "Government Ownership of Banks," NBER Working Papers 7620, National Bureau of Economic Research, Inc.
  2. Arnold, Ivo J. M., 2007. "Financial stability in the Eurozone: where do we stand?," Journal of Financial Transformation, Capco Institute, vol. 19, pages 65-79.
  3. repec:ner:tilbur:urn:nbn:nl:ui:12-176184 is not listed on IDEAS
  4. Adrian Blundell-Wignall & Patrick Slovik, 2010. "The EU Stress Test and Sovereign Debt Exposures," OECD Working Papers on Finance, Insurance and Private Pensions 4, OECD Publishing.
  5. Barry Eichengreen & Charles Wyplosz, 1998. "The Stability Pact: more than a minor nuisance?," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 65-113, 04.
  6. Buti, Marco & Eijffinger, Sylvester C W & Franco, Daniele, 2003. "Revisiting the Stability and Growth Pact: Grand Design or Internal Adjustment?," CEPR Discussion Papers 3692, C.E.P.R. Discussion Papers.
  7. Arnold, Ivo & Lemmen, Jan, 2001. "The Vulnerability of Banks to Government Default Risk in the EMU," International Finance, Wiley Blackwell, vol. 4(1), pages 101-25, Spring.
  8. repec:ner:tilbur:urn:nbn:nl:ui:12-152958 is not listed on IDEAS
  9. World Bank, 2001. "Finance for Growth : Policy Choices in a Volatile World," World Bank Publications, The World Bank, number 13895.
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