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Are banks affected by their holdings of government debt?

  • Chiara Angeloni
  • Guntram B. Wolff

The strong relation between sovereign and banking stress is frequently emphasised, especially since the start of the European sovereign debt crisis. This working paper sheds light on the determinants of the link. It studies the stock market performance and the holdings of government debt of the banks stress tested by the European Banking Authority in July and December 2011. A number of results stand out: Banksâ?? holdings of the sovereign bonds of vulnerable countries generally decreased during the period December 2010 to September 2011. The average stock market performance of each countryâ??s banks was very uneven during 2011. The long-term refinancing operation (LTRO) had no material effect on banksâ?? stock market values. Greek debt holdings had an effect on banksâ?? market values in the period July to October 2011 while after October this effect disappeared. Holdings of Italian and Irish debt had a material effect on banksâ?? market value in the period October to December 2011. Holdings of debt of other periphery countries, in particular Spain, were not an issue. The July PSI deal did not substantially affect the risk resulting from holdings of debt other than Greek debt. The location of banks matters for their market value. This highlights the need to form a banking union in the euroarea.

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Paper provided by Bruegel in its series Working Papers with number 717.

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Date of creation: Mar 2012
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Handle: RePEc:bre:wpaper:717
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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "The Aftermath of Financial Crises," American Economic Review, American Economic Association, vol. 99(2), pages 466-72, May.
  2. Adrian Alter & Yves Stephan Schüler, 2011. "Credit Spead Interdependencies of European States and Banks during the Financial Crisis," Working Paper Series of the Department of Economics, University of Konstanz 2011-24, Department of Economics, University of Konstanz.
  3. Patrick Bolton & Olivier Jeanne, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," NBER Working Papers 16899, National Bureau of Economic Research, Inc.
  4. Iara, Anna & Wolff, Guntram B., 2014. "Rules and risk in the Euro area," European Journal of Political Economy, Elsevier, vol. 34(C), pages 222-236.
  5. André Sapir & Benedicta Marzinotto & Guntram Wolff, 2011. "What Kind of Fiscal Union ?," ULB Institutional Repository 2013/174293, ULB -- Universite Libre de Bruxelles.
  6. Silvia Merler & Jean Pisani-Ferry, 2012. "Who's afraid of sovereign bonds?," Policy Contributions 695, Bruegel.
  7. Viral V. Acharya & Itamar Drechsler & Philipp Schnabl, 2011. "A Pyrrhic Victory? - Bank Bailouts and Sovereign Credit Risk," NBER Working Papers 17136, National Bureau of Economic Research, Inc.
  8. Ejsing, Jacob & Lemke, Wolfgang, 2011. "The Janus-headed salvation: Sovereign and bank credit risk premia during 2008-2009," Economics Letters, Elsevier, vol. 110(1), pages 28-31, January.
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