How Much of Bank Credit Risk Is Sovereign Risk? Evidence from Europe

91 Pages Posted: 16 Feb 2015 Last revised: 3 Jul 2017

See all articles by Junye Li

Junye Li

ESSEC Business School

Gabriele Zinna

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: July 2, 2017

Abstract

We examine European banks' exposures to systematic and country-specific sovereign risk. We organize our investigation around a multifactor affine credit risk model estimated on CDS data of different maturities. During the 2008-2015 period, about one third of banks' credit risk is sovereign. However, banks strongly differ both in the magnitude and type of their sovereign exposures. Measures of indirect exposures, such as bank size and ROE, capture these cross-sectional differences better than measures of direct exposures. Furthermore, the properties of the distress risk premiums turn out to be important to understand the effect of sovereign risk on bank funding costs.

Keywords: Sovereign and bank credit risk; Credit default swaps; Distress risk premia; Bayesian estimation

JEL Classification: F34; G12; G15

Suggested Citation

Li, Junye and Zinna, Gabriele, How Much of Bank Credit Risk Is Sovereign Risk? Evidence from Europe (July 2, 2017). Available at SSRN: https://ssrn.com/abstract=2565187 or http://dx.doi.org/10.2139/ssrn.2565187

Junye Li

ESSEC Business School ( email )

5 Nepal Park
Singapore, Singapore 139408
Singapore

Gabriele Zinna (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

HOME PAGE: http://gabrielezinna.github.io/

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