40 Pages Posted: 29 May 2015 Last revised: 3 Mar 2017
Date Written: March 1, 2017
We study spillovers from bank risk to sovereign risk in the euro area. Using difference specifications around the European Central Bank's release of the results of its stress test of 130 significant banks on 26 October 2014, we show that this information shock led to a decline in bank equity prices in stressed countries. Surprisingly, CDS spreads of banks in stressed countries were not significantly affected, and non-stressed sovereigns' CDS spread increased. In addition, the co-movement between non-stressed sovereigns and banks in stressed countries strengthened. This suggests that market participants understand that euro area countries share the burden of rescuing foreign banks in distress.
Keywords: bank-sovereign nexus, risk contagion, stress test, European Central Bank, Comprehensive Assessment
JEL Classification: C68, F34
Suggested Citation: Suggested Citation
Breckenfelder, Johannes H. and Schwaab, Bernd, Bank and Sovereign Credit Risk: Spillover Effects from the ECB's Comprehensive Assessment (March 1, 2017). Available at SSRN: https://ssrn.com/abstract=2611107 or http://dx.doi.org/10.2139/ssrn.2611107