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The State Dependent Impact of Bank Exposure on Sovereign Risk

Referierte Aufsätze Web of Science

Maximilian Podstawski, Anton Velinov

In: Journal of Banking & Finance 88 (2018) S. 63-75

Abstract

The theoretical literature remains inconclusive on whether changes in bank exposure to the domestic sovereign have an adverse effect on the sovereign risk position through a diabolic loop in the sovereign-bank nexus, or reduce perceived default risk by acting as a disciplinary device for the sovereign. In this paper we empirically analyze the impact of exogenous changes in bank exposure on the risk position of the sovereign within a Markov switching structural vector autoregressive in heteroscedasticity (MSH-SVAR) framework for a set of EMU countries. We add to the methodological literature by allowing for regime dependent shock transmissions according to the volatility state of the financial system. Finding support for both, a stabilizing and a destabilizing effect, we document a clear clustering among the country sample: rising bank exposure increased default risk for the EMU periphery, but decreased credit risk for the core EMU countries during times of financial stress.



JEL-Classification: C32;E44;G10
Keywords: Markov-switching, Heteroscedasticity, Identification, Sovereign-bank interlinkages, Sovereign risk, Credit default swap, Contagion
DOI:
https://doi.org/10.1016/j.jbankfin.2017.11.002

Frei zugängliche Version: (econstor)
http://hdl.handle.net/10419/231764

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