Bank/sovereign Risk Spillovers in the European Debt Crisis

V. De Bruyckere, M. Gerhardt, G. Schepens

Research output: Working paperDiscussion paperOther research output

Abstract

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.
Original languageEnglish
Place of PublicationTilburg
PublisherEBC
Number of pages49
Volume2012-021
Publication statusPublished - 2012

Publication series

NameEBC Discussion Paper
Volume2012-021

Keywords

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

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