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Bank/sovereign risk spillovers in the European debt crisis

  • 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)

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.

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File URL: https://www.nbb.be/doc/oc/repec/reswpp/wp232en.pdf
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Paper provided by National Bank of Belgium in its series Working Paper Research with number 232.

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Length: 59 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:nbb:reswpp:201210-232
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