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Bank credit risk and sovereign debt exposure: Moral hazard or hedging?

Author

Listed:
  • Baselga-Pascual, Laura
  • Loban, Lidia
  • Myllymäki, Emma-Riikka

Abstract

This study investigates the relationship between credit risk and bank exposure to sovereign debt. Using an international dataset of commercial banks from 2002 to 2022, we apply various regressions and panel data models to address potential endogeneity issues. Our results reveal that banks with higher levels of impaired loans tend to hold more sovereign debt. Furthermore, we observe that this relationship is stronger in countries with high sovereign credit ratings. This suggests that banks, when confronted with elevated credit risk from impaired loans, may seek safety in sovereign debt as a seemingly secure investment.

Suggested Citation

  • Baselga-Pascual, Laura & Loban, Lidia & Myllymäki, Emma-Riikka, 2025. "Bank credit risk and sovereign debt exposure: Moral hazard or hedging?," Finance Research Letters, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:finlet:v:71:y:2025:i:c:s1544612324014831
    DOI: 10.1016/j.frl.2024.106454
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    More about this item

    Keywords

    Financial institutions; Bank risk; Credit risk; Sovereign debt nexus;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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