77 Pages Posted: 16 Feb 2015 Last revised: 20 Apr 2016
Date Written: April 20, 2016
We uncover novel evidence on large Eurozone banks' exposures to sovereign credit risk by estimating a multivariate credit risk model on CDS premia of different maturities. About one third of short-term banks' credit risk is due to sovereign risk, either originating from their exposures to joint sovereign defaults, or to the default risk specific to the domestic sovereign. When the effect of credit risk premia is taken into account, sovereign risk can explain up to 60% of banks' longer-term CDSs. Moreover, market-based measures of banks' sovereign exposures partly reflect bank size, holdings of government bonds, and expected government support.
Keywords: Sovereign and bank credit risk; Credit default swaps; Distress risk premia; Bayesian estimation
JEL Classification: F34; G12; G15
Suggested Citation: Suggested Citation
Li, Junye and Zinna, Gabriele, How Much of Bank Credit Risk Is Sovereign Risk? Evidence from the Eurozone (April 20, 2016). Available at SSRN: https://ssrn.com/abstract=2565187