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How Important Was Contagion Through Banks During the European Sovereign Crisis?

Fisher College of Business Working Paper No. 2017-03-015

Charles A. Dice Center Working Paper No. 2017-15

40 Pages Posted: 10 Jun 2017  

Andrea Beltratti

Bocconi University - Department of Finance

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: June 8, 2017

Abstract

We use days with tail sovereign CDS spread changes of peripheral countries to identify the effects of shocks to the cost of borrowing of these countries on stock returns of banks from other countries. We find that tail sovereign GIIPS CDS changes have an asymmetric impact in that bank stocks benefit more from negative CDS spread shocks than they are hurt by positive shocks, which creates moral hazard and is best explained by a “too-systemic-to-fail” effect. The contagion effects are stronger for more pervasive shocks, so that idiosyncratic shocks to small countries, such as Greece, do not have an economically significant impact, but shocks involving large GIIPS countries or multiple GIIPS countries have such an impact. In our benchmark specification, holdings of peripheral country bonds by banks from other countries do not constitute a statistically or economically significant contagion channel for tail spread increases.

Keywords: contagion, banks, systemic risk, sovereign debt, Eurozone crisis, GIIPS

JEL Classification: F34, G12, G15, G21, H63

Suggested Citation

Beltratti , Andrea and Stulz, René M., How Important Was Contagion Through Banks During the European Sovereign Crisis? (June 8, 2017). Fisher College of Business Working Paper No. 2017-03-015. Available at SSRN: https://ssrn.com/abstract=2983274

Andrea Beltratti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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