Sovereign Portfolio Composition and Bank Risk

36 Pages Posted: 21 Sep 2020 Last revised: 25 Feb 2022

See all articles by Selva Baziki

Selva Baziki

Bloomberg LP

Maria Nieto

Banco de España

Rima Turk-Ariss

International Monetary Fund; Economic Research Forum

Date Written: December 7, 2021

Abstract

This paper presents evidence on the likely composition effects of sovereign portfolios on two accounting based measures of banks’ ex-post risk profile, using granular data by the European Banking Authority. Our study period covers from 2009 to 2018. We find that banks located in European countries with high sovereign credit risk have riskier balance sheets. Also, banks holding a higher proportion of securities issued by a crisis sovereign are riskier than those with lower exposure to those countries. Whereas holding of government securities of the country where the bank is incorporated does not by itself increase ex-post bank risk, banks are riskier when they hold a higher proportion of these securities and the bank is domicile in a high credit risk sovereign country. Finally, banks that received government capital injections show higher risk profile than those banks that did not receive capital support. Our results lend support to central bank interventions to limit the increase in sovereign risk and limit the negative bank sovereign-bank feedback loop.

Keywords: banks, sovereign crisis, EU

JEL Classification: G01, G21, G28, G38

Suggested Citation

Baziki, Selva and Nieto, Maria J. and Turk-Ariss, Rima, Sovereign Portfolio Composition and Bank Risk (December 7, 2021). Available at SSRN: https://ssrn.com/abstract=3668976 or http://dx.doi.org/10.2139/ssrn.3668976

Selva Baziki

Bloomberg LP ( email )

731 Lexington Ave
New York, NY 10022
United States

Maria J. Nieto (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Rima Turk-Ariss

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Economic Research Forum ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Dokki, Cairo
Egypt

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