Bank/sovereign Risk Spillovers in the European Debt Crisis

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

Research output: Working paperDiscussion paperOther research output

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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

Fingerprint

Spillover
Sovereign risk
Debt crisis
Contagion
Bond portfolio
Disclosure
Bank risk
Empirical evidence
Common factors
Credit default swap (CDS) spreads
Funding
Banking
Home bias
Debt ratio
Interaction

Keywords

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

Cite this

De Bruyckere, V., Gerhardt, M., & Schepens, G. (2012). Bank/sovereign Risk Spillovers in the European Debt Crisis. (EBC Discussion Paper; Vol. 2012-021). Tilburg: EBC.
De Bruyckere, V. ; Gerhardt, M. ; Schepens, G. / Bank/sovereign Risk Spillovers in the European Debt Crisis. Tilburg : EBC, 2012. (EBC Discussion Paper).
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De Bruyckere, V, Gerhardt, M & Schepens, G 2012 'Bank/sovereign Risk Spillovers in the European Debt Crisis' EBC Discussion Paper, vol. 2012-021, EBC, Tilburg.

Bank/sovereign Risk Spillovers in the European Debt Crisis. / De Bruyckere, V.; Gerhardt, M.; Schepens, G.

Tilburg : EBC, 2012. (EBC Discussion Paper; Vol. 2012-021).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Bank/sovereign Risk Spillovers in the European Debt Crisis

AU - De Bruyckere, V.

AU - Gerhardt, M.

AU - Schepens, G.

N1 - Pagination: 49

PY - 2012

Y1 - 2012

N2 - 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.

AB - 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.

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KW - sovereign risk

KW - bank business models

KW - bank regulation

KW - sovereign debt crisis

M3 - Discussion paper

VL - 2012-021

T3 - EBC Discussion Paper

BT - Bank/sovereign Risk Spillovers in the European Debt Crisis

PB - EBC

CY - Tilburg

ER -

De Bruyckere V, Gerhardt M, Schepens G. Bank/sovereign Risk Spillovers in the European Debt Crisis. Tilburg: EBC. 2012. (EBC Discussion Paper).