Contingent Liabilities and Sovereign Risk: Evidence from Banking Sectors
CAMA Working Paper 43/2013
52 Pages Posted: 16 Jul 2013
Date Written: October 2012
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: Suggested Citation