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Bank/sovereign risk spillovers in the European debt crisis

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Listed:
  • Valerie De Bruyckere

    () (Ghent University, Department of Financial Economics)

  • Maria Gerhardt

    () (Ghent University, Department of Financial Economics)

  • Glenn Schepens

    () (Ghent University, Department of Financial Economics)

  • Rudi Vander Vennet

    () (Ghent University, Department of Financial Economics)

Abstract

This paper investigates contagion between bank risk and sovereign risk in Europe over the period 2006-2011. Since this period covers various stages of the banking and sovereign crisis, it offers a fertile ground to analyze bank/sovereign risk spillovers. We define contagion as excess correlation, i.e. correlation between banks and sovereigns over and above what is explained by common factors, using CDS spreads at the bank and at the sovereign level. Moreover, we investigate the determinants of contagion by analyzing bank-specific as well as country-specific variables and their interaction. We provide empirical evidence that various contagion channels are at work, including a strong home bias in bank bond portfolios, using the EBA’s disclosure of sovereign exposures of banks. We find that banks with a weak capital and/or funding position are particularly vulnerable to risk spillovers. At the country level, the debt ratio is the most important driver of contagion.

Suggested Citation

  • Valerie De Bruyckere & Maria Gerhardt & Glenn Schepens & Rudi Vander Vennet, 2012. "Bank/sovereign risk spillovers in the European debt crisis," Working Paper Research 232, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:201210-232
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    Keywords

    Contagion; bank risk; sovereign risk; bank business models; bank regulation; sovereign debt crisis;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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