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The co-movement between sovereign and bank credit risk during the financial crisis: the case of the Euro Area

Author

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  • Federico Nucera

    (Prometeia Spa, CASMEF Luiss Guido Carli, Rimini Center for Economic Analysis)

Abstract

We investigate the comovement between sovereign and bank credit riskin the Euro area over the period 2008-2010. We construct two synthetic credit risk measures of the European sovereign and banking sectors that can be used for macro-prudential supervision. We estimate a Vector error-correction model and we obtain empirical evidence of a cointegration relationship between sovereign and bank credit risk. Moreover, we find that deviations from this equilibrium relationship are adjusted through the banking sector. Finally, impulse response functions show that it is possible to distinguish between a permanent sovereign shock and a transitory banking shock.

Suggested Citation

  • Federico Nucera, 2012. "The co-movement between sovereign and bank credit risk during the financial crisis: the case of the Euro Area," Rivista Bancaria - Minerva Bancaria, Istituto di Cultura Bancaria Francesco Parrillo, issue 6, December.
    • Handle: RePEc:rvs:bancar:12_6_1
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    Citations

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    Cited by:

    1. Marcel Fratzscher & Malte Rieth, 2019. "Monetary Policy, Bank Bailouts and the Sovereign-Bank Risk Nexus in the Euro Area," Review of Finance, European Finance Association, vol. 23(4), pages 745-775.
    2. Papafilis, Michalis-Panayiotis & Psillaki, Maria & Margaritis, Dimitris, 2015. "Interdependence between Sovereign and Bank CDS Spreads in Eurozone during the European Debt Crisis - The PSI Effect," MPRA Paper 68037, University Library of Munich, Germany.

    More about this item

    Keywords

    financial stability; sovereign sector credit risk; banking sector credit risk; nth-to-default CDS; portfolio credit risk management;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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