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How much of bank credit risk is sovereign risk? Evidence from the eurozone

Author

Listed:
  • Junye Li

    () (ESSEC Business School)

  • Gabriele Zinna

    () (Bank of Italy)

Abstract

We develop a multivariate credit risk model for the term structures of sovereign and bank credit default swaps. First, we separate the probability of joint defaults of large Eurozone sovereigns (systemic risk) from that of sovereign-specific defaults (country risk). Then, we quantify individual banks' exposures to each type of sovereign risk, as well as bank-specific credit risk. Banks� sovereign risk exposures vary with banks� size, their holdings of sovereign debt, and expected government support. On average, 45% of French and Spanish banks' credit risk consists in sovereign risk, compared with only 30% for Italian and 23% for German banks. Furthermore, short- to medium-term contracts are particularly informative on sovereign systemic risk.

Suggested Citation

  • Junye Li & Gabriele Zinna, 2014. "How much of bank credit risk is sovereign risk? Evidence from the eurozone," Temi di discussione (Economic working papers) 990, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_990_14
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    Cited by:

    1. Sergio Masciantonio & Andrea Zaghini, 2017. "Systemic risk and systemic importance measures during the crisis," Temi di discussione (Economic working papers) 1153, Bank of Italy, Economic Research and International Relations Area.
    2. Xisong Jin & Francisco Nadal De Simone, 2017. "Systemic Financial Sector and Sovereign Risks," BCL working papers 109, Central Bank of Luxembourg.

    More about this item

    Keywords

    Sovereign and Bank Credit Risk; Credit Default Swaps; Distress Risk Premia; Bayesian Estimation.;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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