Bank/Sovereign Risk Spillovers in the European Debt Crisis

National Bank of Belgium Working Paper No. 232

59 Pages Posted: 13 Oct 2012

See all articles by Valerie De Bruyckere

Valerie De Bruyckere

Ghent University - Department of Financial Economics

Maria Gerhardt

Ghent University-Universiteit Gent

Glenn Schepens

ECB -Financial Research Division

Rudi Vander Vennet

Ghent University-Universiteit Gent - Department of Financial Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 3, 2012

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.

Keywords: Contagion, bank risk, sovereign risk, bank business models, bank regulation, sovereign debt crisis

JEL Classification: G01, G21, G28, H6

Suggested Citation

Bruyckere, Valerie De and Gerhardt, Maria and Schepens, Glenn and Vander Vennet, Rudi, Bank/Sovereign Risk Spillovers in the European Debt Crisis (September 3, 2012). National Bank of Belgium Working Paper No. 232. Available at SSRN: https://ssrn.com/abstract=2160844 or http://dx.doi.org/10.2139/ssrn.2160844

Valerie De Bruyckere (Contact Author)

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium

Maria Gerhardt

Ghent University-Universiteit Gent ( email )

Coupure Links 653
Gent, 9000
Belgium

Glenn Schepens

ECB -Financial Research Division ( email )

Frankfurt am Main
Germany

Rudi Vander Vennet

Ghent University-Universiteit Gent - Department of Financial Economics ( email )

Ghent, 9000
Belgium
+32 9 264 35 13 (Phone)
+32 9 264 35 92 (Fax)

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