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Bank to Sovereign Risk Spillovers Across Borders: Evidence from the ECB's Comprehensive Assessment

35 Pages Posted: 29 May 2015 Last revised: 27 Nov 2017

Johannes H. Breckenfelder

European Central Bank (ECB) - Financial Research

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research

Date Written: November 24, 2017

Abstract

We study spillovers from bank to sovereign risk in the euro area using difference specifications around the European Central Bank's release of stress test results for 130 significant banks on October 26, 2014. We document that following this information release bank equity prices in stressed countries declined. Surprisingly, bank risk in stressed countries was not absorbed by their sovereigns but spilled over to non-stressed euro area sovereigns. As a result, in non-stressed countries, the co-movement between sovereign and bank risk increased. This suggests that market participants perceived that bank risk is shared within the euro area.

Keywords: bank-sovereign nexus, risk spillovers, stress test, European Central Bank, Comprehensive Assessment

JEL Classification: C68, F34

Suggested Citation

Breckenfelder, Johannes H. and Schwaab, Bernd, Bank to Sovereign Risk Spillovers Across Borders: Evidence from the ECB's Comprehensive Assessment (November 24, 2017). Available at SSRN: https://ssrn.com/abstract=2611107 or http://dx.doi.org/10.2139/ssrn.2611107

Johannes 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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