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Bank and Sovereign Credit Risk: Spillover Effects from the ECB's Comprehensive Assessment

40 Pages Posted: 29 May 2015 Last revised: 3 Mar 2017

Johannes H. Breckenfelder

European Central Bank (ECB) - Financial Research

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research

Date Written: March 1, 2017

Abstract

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

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

Johannes H. Breckenfelder (Contact Author)

European Central Bank (ECB) - Financial Research ( email )

Sonnemannstrasse 20
D-60314 Frankfurt am Main
Germany

HOME PAGE: http://johannesbreckenfelder.eu/

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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