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Monetary policy, bank bailouts and the sovereign-bank risk nexus in the euro area

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  • Fratzscher, Marcel
  • Rieth, Malte

Abstract

The paper analyses the empirical relationship between bank risk and sovereign credit risk in the euro area. Using structural VAR with daily financial markets data for 2003-13, the analysis confirms two-way causality between shocks to sovereign risk and bank risk, with the former being overall more important in explaining bank risk, than vice versa. The paper focuses specifically on the impact of non-standard monetary policy measures by the European Central Bank and on the effects of bank bailout policies by national governments. Testing specific hypotheses formulated in the literature, we find that bank bailout policies have reduced solvency risk in the banking sector, but partly at the expense of raising the credit risk of sovereigns. By contrast, monetary policy was in most, but not all cases effective in lowering credit risk among both sovereigns and banks. Finally, we find spillover effects in particular from sovereigns in the euro area periphery to the core countries.

Suggested Citation

  • Fratzscher, Marcel & Rieth, Malte, 2015. "Monetary policy, bank bailouts and the sovereign-bank risk nexus in the euro area," CEPR Discussion Papers 10370, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10370
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    More about this item

    Keywords

    bank bailout; banks; credit risk; heteroscedasticity; monetary policy; sovereigns; spillovers;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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