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Contingent Liabilities and Sovereign Risk: Evidence from Banking Sectors

Author

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  • Serkan Arslanalp
  • Yin Liao

Abstract

This paper proposes a simple method to estimate contingent liabilities that arise from (implicit and explicit) government guarantees to the banking sector. This method allows us to construct cross-country estimates on potential costs of bank failures. Furthermore, we empirically test whether the contingent liabilities from the banking sector is a significant determinant of sovereign risk based on the data from 32 countries. Our results suggest that a 1% of GDP increase in contingent liabilities is associated with an increase in sovereign CDS spreads of 24 basis points in advanced countries and 75 basis points in emerging economies.

Suggested Citation

  • Serkan Arslanalp & Yin Liao, 2013. "Contingent Liabilities and Sovereign Risk: Evidence from Banking Sectors," CAMA Working Papers 2013-43, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2013-43
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2017-02/43_2013_arslanalp_liao.pdf
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    References listed on IDEAS

    as
    1. Dale F. Gray & Elena Loukoianova & Samuel W. Malone & Cheng Hoon Lim, 2008. "A Risk-Based Debt Sustainability Framework; Incorporating Balance Sheets and Uncertainty," IMF Working Papers 08/40, International Monetary Fund.
    2. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    3. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    4. Hoggarth, Glenn & Reis, Ricardo & Saporta, Victoria, 2002. "Costs of banking system instability: Some empirical evidence," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 825-855, May.
    5. Andreas A. Jobst & Dale F. Gray, 2013. "Systemic Contingent Claims Analysis; Estimating Market-Implied Systemic Risk," IMF Working Papers 13/54, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Corsetti, Giancarlo & Kuester, Keith & Meier, André & Müller, Gernot J., 2014. "Sovereign risk and belief-driven fluctuations in the euro area," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 53-73.
    2. Mikhail Stolbov, 2014. "How Are Interbank and Sovereign Debt Markets Linked? Evidence from 14 OECD Countries, the Euro Area and Russia," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(3), pages 331-348, June.
    3. repec:dau:papers:123456789/7874 is not listed on IDEAS
    4. Elva Bova & Marta Ruiz-Arranz & Frederik G Toscani & H. Elif Ture, 2016. "The Fiscal Costs of Contingent Liabilities; A New Dataset," IMF Working Papers 16/14, International Monetary Fund.

    More about this item

    Keywords

    Contingent Liabilities; Sovereign Risk; Banking Sector;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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