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Dissecting the ‘doom loop’: the bank-sovereign credit risk nexus during the US debt ceiling crisis

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  • Gori, Filippo

Abstract

Political events matter in economics. This paper uses the 2011 political standoff over the rise of the US debt ceiling to characterise an instrument that is then used to estimate the impact of sovereign on bank credit risk. Results show that a 100 basis points increase in the US sovereign default risk implies a 41 basis points increase in bank credit risk; this effect is about three times larger than the corresponding effect of bank default risk on sovereign’s. Finally, calculation suggest that during the first two quarters of 2011, as a consequence of the debt ceiling crisis, US bank funding costs increased by approximately 18 basis points.

Suggested Citation

  • Gori, Filippo, 2018. "Dissecting the ‘doom loop’: the bank-sovereign credit risk nexus during the US debt ceiling crisis," MPRA Paper 87994, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:87994
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    References listed on IDEAS

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    More about this item

    Keywords

    Banks; Sovereign default risk;

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • 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

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