How the euro-area sovereign-debt crisis led to a collapse in bank equity prices

Abstract

We quantify the linkages among banks' equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a long-run recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks' equity-prices. Our results also point to the importance of using levels of equity prices-rather than rates of return-in measuring banks' performance. The use of levels allows us to derive the determinants of long-run equity prices.

Assessing methodology of banks' ratings and their competitive positions: overview of main rating agencies

“…As support factors: sovereign ability to support system (size of banking system relative to economy, size of potential problem, structure of banking system, liability structure of banking system, sovereign financial flexibility), sovereign propensity to support system (resolution legislation with senior debt bail-in, track record of banking sector support, government statements of support), sovereign propensity to support bank (systemic importance, liability structure of bank, ownership, specifics of bank failure) and policy banks (policy role, funding guarantees, and legal status, government ownership). Many authors (Acharya et al, 2014;Brunnermeier et al, 2016;Gibson et al, 2016) spots that sovereign rating considerably affects bank performances. Securities issued from banks in the sovereign region were positively correlated with sovereign circumstances.…”

Self-fulfilling dynamics: The interactions of sovereign spreads, sovereign ratings and bank ratings during the euro financial crisis

“…Nevertheless, some restrictions are needed to identify the system in order to initiate the nesting-down procedure. We have, therefore, based these (minimal) restrictions on previous work (Gibson, Hall and Tavlas, 2016) The results of estimating this 3-equation system (using GMM) are presented in Table 3. 14 As expected, both the sovereign spreads equation and the sovereign ratings equations are directly impacted by the economic fundamentals.…”

Perceived vs Actual Financial Crisis and Bank Credit Standards: Is There Any Indication of Self-Fulfilling Prophecy?

“…The specification of the above-mentioned dummy was not only based on our identification assumption but it was also based on some past relative literature which supports that the beginning of the financial crisis in Europe was the year 2008 (Ivashina, and Scharfstein, 2010;Lane, 2012;Demirguc Kunt et. al., 2013;Gibson et. al., 2016).…”