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Sovereign Risk Spillover Effects and the Role of Systemically Important Financial Institutions: Evidence from the European Debt Crisis

Listed author(s):
  • Haoshen Hu

    (University of Oldenburg)

  • Jörg Prokop

    (University of Oldenburg - Finance and Banking; ZenTra - Center for Transnational Studies)

  • Hans‐Michael Trautwein

    (Carl von Ossietzky Universität Oldenburg; ZenTra - Center for Transnational Studies)

We analyse two-way spillover effects between sovereign ratings and bank ratings across 17 Eurozone countries for the period 2002-2013. We show that sovereign rating actions including watchlist placements and outlooks have a significant impact on bank ratings. During the financial crisis, downgrade spillovers from sovereigns to systematically important financial institutions (SIFIs) are stronger than spillovers to non-SIFIs. Moreover, we provide evidence on the existence of a bank-to-sovereign rating transmission channel. Downgrades of SIFIs increase the probability of multiple-notch downgrades of sovereign ratings. Dividing the sample into PIIGS and non-PIIGS subsets, we find bank-to-sovereign spillovers to exist only in the PIIGS subsample.

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File Function: First version, 2016
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Paper provided by ZenTra - Center for Transnational Studies in its series ZenTra Working Papers in Transnational Studies with number 69 / 2016.

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Length: 30 pages
Date of creation: Nov 2016
Date of revision: Nov 2016
Handle: RePEc:zen:wpaper:69
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