Sovereign Risk Spillover Effects and the Role of Systemically Important Financial Institutions: Evidence from the European Debt Crisis

30 Pages Posted: 23 Nov 2016

See all articles by Haoshen Hu

Haoshen Hu

University of Oldenburg

Jörg Prokop

University of Oldenburg - Finance and Banking; ZenTra - Center for Transnational Studies

Hans‐Michael Trautwein

Carl von Ossietzky Universität Oldenburg; ZenTra - Center for Transnational Studies

Date Written: November 23, 2016

Abstract

We analyse two-way spillover effects between sovereign ratings and bank ratings across 17 Eurozone countries for the period 2002-2013. We show that sovereign rating actions including watchlist placements and outlooks have a significant impact on bank ratings. During the financial crisis, downgrade spillovers from sovereigns to systematically important financial institutions (SIFIs) are stronger than spillovers to non-SIFIs. Moreover, we provide evidence on the existence of a bank-to-sovereign rating transmission channel. Downgrades of SIFIs increase the probability of multiple-notch downgrades of sovereign ratings. Dividing the sample into PIIGS and non-PIIGS subsets, we find bank-to-sovereign spillovers to exist only in the PIIGS subsample.

Keywords: bank rating, sovereign rating, two-way spillover effect, European sovereign debt crisis

JEL Classification: F36, G15, G24

Suggested Citation

Hu, Haoshen and Prokop, Jörg and Trautwein, Hans-Michael, Sovereign Risk Spillover Effects and the Role of Systemically Important Financial Institutions: Evidence from the European Debt Crisis (November 23, 2016). ZenTra Working Paper in Transnational Studies No. 69/2016. Available at SSRN: https://ssrn.com/abstract=2874725

Haoshen Hu

University of Oldenburg ( email )

Ammerländer Heerstraße 114-118
Oldenburg, D-26111
Germany

Jörg Prokop

University of Oldenburg - Finance and Banking ( email )

Germany

ZenTra - Center for Transnational Studies ( email )

Ammerländer Heerstraße 138
Oldenburg, 26131
Germany

Hans-Michael Trautwein (Contact Author)

Carl von Ossietzky Universität Oldenburg ( email )

Ammerländer Heerstraße 114-118
Oldenburg, D-26111
Germany

HOME PAGE: http://www.iw.uni-oldenburg.de/

ZenTra - Center for Transnational Studies ( email )

Ammerländer Heerstraße 138
Oldenburg, 26131
Germany

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