An Empirical Study of International Spillover of Sovereign Risk to Bank Credit Risk

Abstract

The severity and complexity of the recent financial crisis has motivated the need for understanding the relationships between sovereign ratings and bank credit ratings. This is the first study to examine the impact of the “international” spillover of sovereign risk to bank credit risk through both a ratings channel and an asset holdings channel. In the first case, the downgrade of sovereign ratings in GIIPS (Greece, Italy, Ireland, Portugal, and Spain) countries leads to rating downgrades of banks in the peripheral countries. The second channel indicates that larger asset holdings of GIIPS debt increases the credit risk of cross‐border banks, and hence, the probabilities of downgrade.

The rating spillover from banks to sovereigns: An empirical investigation across the European Union

“…1 In line with the recent literature in credit rating which suggests that positive and negative rating actions are driven by distinct factors (see e.g. Afonso et al, 2012;Poon et al, 2017;Williams et al, 2013), we investigate bank-tosovereign rating contagion effects separately for sovereign upgrades and downgrades:…”

“…In this paper, we concern with the relationship between sovereign credit ratings and domestic bank credit ratings in terms of credit risk spillover. Numerous studies show that there is a sovereign-to-banking rating spillover effect through the sovereign ceiling channel (see Williams et al, 2013;Alsakka et al, 2014;Poon et al, 2017;Klusak et al, 2017; Almeida et al 2017; among others). However, few papers, if not none, examine the opposite direction, i.e.…”

Volatility Spillovers among Sovereign Credit Default Swaps of Emerging Economies and Their Determinants

“…Whether corporate or sovereign, credit risk significantly threatens financial stability (Ghenimi et al 2017). The latter, sovereign credit risk, has become a pressing concern, given its potential to destabilize countries and financial positions (Poon et al 2017). The importance of sovereign risk is further underscored by the attention garnered by sovereign credit default swaps (SCDSs) since the European debt crisis.…”