Contingent Liabilities and Sovereign Risk: Evidence from Banking Sectors

CAMA Working Paper 43/2013

52 Pages Posted: 16 Jul 2013

See all articles by Serkan Arslanalp

Serkan Arslanalp

International Monetary Fund (IMF)

Yin Liao

Australian National University - The Centre for Applied Macroeconomic Analysis (CAMA); Macquarie University - Department of Applied Finance and Actuarial Studies

Multiple version iconThere are 2 versions of this paper

Date Written: October 2012

Abstract

This paper proposes a simple method to estimate contingent liabilities that arise from (implicit and explicit) government guarantees to the banking sector. This method allows us to construct cross-country estimates on potential costs of bank failures. Furthermore, we empirically test whether the contingent liabilities from the banking sector is a significant determinant of sovereign risk based on the data from 32 countries. Our results suggest that a 1% of GDP increase in contingent liabilities is associated with an increase in sovereign CDS spreads of 24 basis points in advanced countries and 75 basis points in emerging economies.

Keywords: Contingent Liabilities, Sovereign Risk, Banking Sector

JEL Classification: G13, G21, G38

Suggested Citation

Arslanalp, Serkan and Liao, Yin and Liao, Yin, Contingent Liabilities and Sovereign Risk: Evidence from Banking Sectors (October 2012). CAMA Working Paper 43/2013, Available at SSRN: https://ssrn.com/abstract=2294209 or http://dx.doi.org/10.2139/ssrn.2294209

Serkan Arslanalp

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Yin Liao (Contact Author)

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Eastern Rd.
North Ryde
Sydney, NSW 2109
United States

Australian National University - The Centre for Applied Macroeconomic Analysis (CAMA) ( email )

Canberra, Australian Capital Territory 2601
Australia

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