Sovereign Credit Risk, Banks' Government Support, and Bank Stock Returns Around the World

51 Pages Posted: 30 May 2017

See all articles by Ricardo Correa

Ricardo Correa

Board of Governors of the Federal Reserve System

Kuan-Hui Lee

Seoul National University Business School

Horacio Sapriza

Board of Governors of the Federal Reserve System

Gustavo A. Suarez

Harvard University

Date Written: 2012

Abstract

We explore the joint effect of expected government support to banks and changes in sovereign credit ratings on bank stock returns using data for banks in 37 countries between 1995 and 2011. We find that sovereign credit rating downgrades have a large negative effect on bank stock returns for those banks that are expected to receive stronger support from their governments. This result is stronger for banks in advanced economies where governments are better-positioned to provide that support. Our results suggest that stock market investors perceive sovereigns and domestic banks as markedly interconnected, partly through government guarantees.

Suggested Citation

Correa, Ricardo and Lee, Kuan-Hui and Sapriza, Horacio and Suarez, Gustavo A., Sovereign Credit Risk, Banks' Government Support, and Bank Stock Returns Around the World (2012). FRB International Finance Discussion Paper No. 1069. Available at SSRN: https://ssrn.com/abstract=2976762

Ricardo Correa (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Kuan-Hui Lee

Seoul National University Business School ( email )

703 LG-bldg, Business School,
Seoul National Univ., 1 Kwanak-Ro, Kwanak-Gu
Seoul, 151-916
Korea, Republic of (South Korea)
+82 2 880-6924 (Phone)

HOME PAGE: http://sites.google.com/site/kuanlee70/

Horacio Sapriza

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Gustavo A. Suarez

Harvard University ( email )

Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
11
Abstract Views
139
PlumX Metrics