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The Janus-headed salvation: sovereign and bank credit risk premia during 2008-09

  • Ejsing, Jacob
  • Lemke, Wolfgang

As the global banking crisis intensified in the fall of 2008, governments announced comprehensive rescue packages for financial institutions. In this paper, we put the joint response of euro area bank and sovereign CDS premia under the microscope. We find that the bank rescue packages led to a clear structural break in these premia's comovement, which had been rather tight and stable in the weeks preceding the in-tensification of the crisis. Firstly, the packages induced a decrease in risk spreads for banks at the expense of a marked increase in risk spreads for governments. Secondly, we show that in addition to this one-off jump in the levels of CDS spreads, the packages strongly increased the sensitivity of sovereign risk spreads to any further aggravation of the crisis. At the same time, the sensitivity of bank credit risk premia declined and became more sovereign-like, reflecting the extensive government guarantees of banking sector liabilities. JEL Classification: G15, G21

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Paper provided by European Central Bank in its series Working Paper Series with number 1127.

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Date of creation: Dec 2009
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Handle: RePEc:ecb:ecbwps:20091127
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  1. Carlo Favero & Marco Pagano & Ernst-Ludwig von Thadden, 2007. "How Does Liquidity Affect Government Bond Yields?," Working Papers 323, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Alessandro Beber & Michael W. Brandt & Kenneth A. Kavajecz, 2009. "Flight-to-Quality or Flight-to-Liquidity? Evidence from the Euro-Area Bond Market," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 925-957, March.
  3. Lorenzo Codogno & Carlo Favero & Alessandro Missale, 2003. "Yield spreads on EMU government bonds," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 503-532, October.
  4. Edda Zoli & Silvia Sgherri, 2009. "Euro Area Sovereign Risk During the Crisis," IMF Working Papers 09/222, International Monetary Fund.
  5. Salvador Barrios & Per Iversen & Magdalena Lewandowska & Ralph Setzer, 2009. "Determinants of intra-euro area government bond spreads during the financial crisis," European Economy - Economic Papers 388, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  6. Bernoth, Kerstin & von Hagen, Jürgen & Schuknecht, Ludger, 2004. "Sovereign risk premia in the European government bond market," ZEI Working Papers B 26-2003, ZEI - Center for European Integration Studies, University of Bonn.
  7. Alois Geyer & Stephan Kossmeier & Stefan Pichler, 2004. "Measuring Systematic Risk in EMU Government Yield Spreads," Review of Finance, Springer, vol. 8(2), pages 171-197.
  8. Manganelli, Simone & Wolswijk, Guido, 2007. "Market discipline, financial integration and fiscal rules: what drives spreads in the euro area government bond market?," Working Paper Series 0745, European Central Bank.
  9. Ashoka Mody, 2009. "From Bear Stearns to Anglo Irish; How Eurozone Sovereign Spreads Related to Financial Sector Vulnerability," IMF Working Papers 09/108, International Monetary Fund.
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