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Recent evidence on the sovereign-bank nexus in the euro area

Author

Listed:
  • Bochmann, Paul
  • Kagerer, Benedikt
  • Pancaro, Cosimo

Abstract

This paper estimates sovereign-bank default risk spillovers in the euro area. Spillovers spiked at the start of the COVID-19 pandemic and of the Russian invasion of Ukraine but remained contained during the March 2023 banking sector turmoil. Panel regressions find that higher banks’ sovereign exposures increase spillovers between the creditor bank and the borrowing sovereign. Countries with lower GDP growth, higher default probabilities, and a higher debt burden transmit more risk to banks. Larger, less capitalized and more funding-risk-exposed banks convey more default risk to sovereigns. Public aid to the financial sector reduces spillovers.

Suggested Citation

  • Bochmann, Paul & Kagerer, Benedikt & Pancaro, Cosimo, 2024. "Recent evidence on the sovereign-bank nexus in the euro area," Finance Research Letters, Elsevier, vol. 69(PB).
    • Handle: RePEc:eee:finlet:v:69:y:2024:i:pb:s1544612324011371
    DOI: 10.1016/j.frl.2024.106108
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