Banking and Sovereign Risk in the Euro Area

68 Pages Posted: 8 Jun 2016

See all articles by Stefan Gerlach

Stefan Gerlach

Central Bank of Ireland; Centre for Economic Policy Research (CEPR)

Alexander Schulz

Deutsche Bundesbank

Guntram B. Wolff

Deutsche Bundesbank; University of Bonn - Center for European Integration Studies (ZEI)

Multiple version iconThere are 2 versions of this paper

Date Written: 2010

Abstract

We study the determinants of sovereign bond spreads in the euro area since the introduction of the euro. We show that an aggregate risk factor is a main driver of spreads. This factor also plays an important indirect role for risk spreads through its interaction with the size and structure of national banking sectors. When aggregate risk increases, countries with large banking sectors and low equity ratios in the banking sector experience greater widening in yield spreads, suggesting that financial markets perceive a larger risk that governments will have to rescue banks, increasing public debt and therefore sovereign risk. Moreover, government debt levels and forecasts of future fiscal deficits are also significant determinants of sovereign spreads.

Keywords: Sovereign bond markets, banking, liquidity, EMU

JEL Classification: E43, E44, G12

Suggested Citation

Gerlach, Stefan and Schulz, Alexander and Wolff, Guntram B., Banking and Sovereign Risk in the Euro Area (2010). Bundesbank Series 1 Discussion Paper No. 2010,09. Available at SSRN: https://ssrn.com/abstract=2785373

Stefan Gerlach (Contact Author)

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Alexander Schulz

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Guntram B. Wolff

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

University of Bonn - Center for European Integration Studies (ZEI) ( email )

Regina-Pacis-Weg 3
Postfach 2220
D-53012 Bonn
Germany

HOME PAGE: http://www.uni-bonn.de/~guntram

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
221
Abstract Views
960
rank
123,157
PlumX Metrics