How Much of Bank Credit Risk is Sovereign Risk? Evidence from the Eurozone

78 Pages Posted: 28 Feb 2015

See all articles by Junye Li

Junye Li

Fudan University - School of Management

Gabriele Zinna

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: October 23, 2014

Abstract

We develop a multivariate credit risk model for the term structures of sovereign and bank credit default swaps. First, we separate the probability of joint defaults of large Eurozone sovereigns (systemic risk) from that of sovereign-specific defaults (country risk). Then, we quantify individual banks' exposures to each type of sovereign risk, as well as bank-specific credit risk. Banks’ sovereign risk exposures vary with banks’ size, their holdings of sovereign debt, and expected government support. On average, 45% of French and Spanish banks' credit risk consists in sovereign risk, compared with only 30% for Italian and 23% for German banks. Furthermore, short- to medium-term contracts are particularly informative on sovereign systemic risk.

Keywords: Sovereign and Bank Credit Risk, Credit Default Swaps, Distress Risk Premia, Bayesian Estimation

JEL Classification: F34, G12, G15

Suggested Citation

Li, Junye and Zinna, Gabriele, How Much of Bank Credit Risk is Sovereign Risk? Evidence from the Eurozone (October 23, 2014). Bank of Italy Temi di Discussione (Working Paper) No. 990, Available at SSRN: https://ssrn.com/abstract=2571288 or http://dx.doi.org/10.2139/ssrn.2571288

Junye Li

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Gabriele Zinna (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

HOME PAGE: http://gabrielezinna.github.io/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
83
Abstract Views
894
Rank
177,973
PlumX Metrics