Bank Sovereign Bond Holdings, Sovereign Shock Spillovers, and Moral Hazard During the European Crisis

Fisher College of Business Working Paper No. 2015-03-06

Charles A. Dice Center Working Paper No. 2015-06

44 Pages Posted: 28 Apr 2015 Last revised: 6 May 2015

Andrea Beltratti

Bocconi University - Department of Finance

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: April 1, 2015

Abstract

From 2010 to 2012, the relation between bank stock returns from European Union (EU) countries and the returns on sovereign CDS of peripheral (GIIPS) countries is negative. We use days with tail sovereign CDS returns of peripheral countries to identify the effects of shocks to the cost of borrowing of these countries on EU banks from other countries. A CDS tail return affects banks with greater exposure to the country experiencing that return more, but it has an impact on banks regardless of exposure. Shocks to peripheral countries that are more pervasive impact the returns of banks from countries that experience no shock more than shocks to small individual peripheral countries. In general, the impact of tail returns is asymmetric in that banks suffer less from adverse shocks to peripheral countries than they gain from favourable shocks to such countries.

Keywords: Corporate Finance

JEL Classification: F34, G12, G15, G21, H63

Suggested Citation

Beltratti , Andrea and Stulz, René M., Bank Sovereign Bond Holdings, Sovereign Shock Spillovers, and Moral Hazard During the European Crisis (April 1, 2015). Charles A. Dice Center Working Paper No. 2015-06. Available at SSRN: https://ssrn.com/abstract=2599654 or http://dx.doi.org/10.2139/ssrn.2599654

Andrea Beltratti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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