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

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Haoshen Hu & Jörg Prokop & Hans‐Michael Trautwein, 2016. "Sovereign Risk Spillover Effects and the Role of Systemically Important Financial Institutions: Evidence from the European Debt Crisis," ZenTra Working Papers in Transnational Studies 69 / 2016, ZenTra - Center for Transnational Studies, revised Nov 2016.
    • Handle: RePEc:zen:wpaper:69
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2874725
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    More about this item

    Keywords

    bank rating; sovereign rating; two-way spillover effect; European sovereign debt crisis;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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