Department of Economics and Business Economics

The Bank-Sovereign Nexus: Evidence from a non-Bailout Episode

Research output: Working paperResearch

Standard

The Bank-Sovereign Nexus: Evidence from a non-Bailout Episode. / Caporin, Massimiliano; Natvik, Gisle J.; Ravazzolo, Francesco; Santucci de Magistris, Paolo.

Aarhus : Institut for Økonomi, Aarhus Universitet, 2017.

Research output: Working paperResearch

Harvard

Caporin, M, Natvik, GJ, Ravazzolo, F & Santucci de Magistris, P 2017 'The Bank-Sovereign Nexus: Evidence from a non-Bailout Episode' Institut for Økonomi, Aarhus Universitet, Aarhus.

APA

Caporin, M., Natvik, G. J., Ravazzolo, F., & Santucci de Magistris, P. (2017). The Bank-Sovereign Nexus: Evidence from a non-Bailout Episode. Institut for Økonomi, Aarhus Universitet. CREATES Research Papers, No. 2017-25

CBE

Caporin M, Natvik GJ, Ravazzolo F, Santucci de Magistris P. 2017. The Bank-Sovereign Nexus: Evidence from a non-Bailout Episode. Aarhus: Institut for Økonomi, Aarhus Universitet.

MLA

Caporin, Massimiliano et al. The Bank-Sovereign Nexus: Evidence from a non-Bailout Episode. Aarhus: Institut for Økonomi, Aarhus Universitet. (CREATES Research Papers; Journal number 2017-25). 2017., 27 p.

Vancouver

Caporin M, Natvik GJ, Ravazzolo F, Santucci de Magistris P. The Bank-Sovereign Nexus: Evidence from a non-Bailout Episode. Aarhus: Institut for Økonomi, Aarhus Universitet. 2017 Jul 18.

Author

Caporin, Massimiliano ; Natvik, Gisle J. ; Ravazzolo, Francesco ; Santucci de Magistris, Paolo. / The Bank-Sovereign Nexus: Evidence from a non-Bailout Episode. Aarhus : Institut for Økonomi, Aarhus Universitet, 2017. (CREATES Research Papers; No. 2017-25).

Bibtex

@techreport{eb06b44abd6149c0be26ed5fa1320319,
title = "The Bank-Sovereign Nexus: Evidence from a non-Bailout Episode",
abstract = "We explore the interplay between sovereign and bank credit risk in a setting where Danish authorities first let two Danish banks default rather than bail them out and then left the country's largest bank, Danske Bank, to recapitalize privately. We find that the correlation between bank and sovereign credit default swap (CDS) rates changed with these events, indicating that the non-bailout decisions and recapitalization helped to curb the feedback loop between bank and sovereign risk. Following the non-bailout events, the sensitivity to external shocks declined both for Danske Bank and for Danish sovereign debt, as measured by their CDS connection with CDS rates on the European banking sector. After Danske Bank was recapitalized, its exposure to the European banking sector reappeared, while that did not happen for Danish sovereign debt. This decoupling between CDS rates on sovereign and private bank debt indicates that the non-bailout policies succeeded in breaking the vicious circle generated by the risks on the bank and sovereign debts. Our results are reinforced by the use of an indirect testing approach and by focusing on CDS-quantiles.",
keywords = "Bailout expectation, risk, CDS, spillover, quantile regression",
author = "Massimiliano Caporin and Natvik, {Gisle J.} and Francesco Ravazzolo and {Santucci de Magistris}, Paolo",
year = "2017",
month = jul,
day = "18",
language = "English",
series = "CREATES Research Papers",
publisher = "Institut for {\O}konomi, Aarhus Universitet",
number = "2017-25",
type = "WorkingPaper",
institution = "Institut for {\O}konomi, Aarhus Universitet",

}

RIS

TY - UNPB

T1 - The Bank-Sovereign Nexus: Evidence from a non-Bailout Episode

AU - Caporin, Massimiliano

AU - Natvik, Gisle J.

AU - Ravazzolo, Francesco

AU - Santucci de Magistris, Paolo

PY - 2017/7/18

Y1 - 2017/7/18

N2 - We explore the interplay between sovereign and bank credit risk in a setting where Danish authorities first let two Danish banks default rather than bail them out and then left the country's largest bank, Danske Bank, to recapitalize privately. We find that the correlation between bank and sovereign credit default swap (CDS) rates changed with these events, indicating that the non-bailout decisions and recapitalization helped to curb the feedback loop between bank and sovereign risk. Following the non-bailout events, the sensitivity to external shocks declined both for Danske Bank and for Danish sovereign debt, as measured by their CDS connection with CDS rates on the European banking sector. After Danske Bank was recapitalized, its exposure to the European banking sector reappeared, while that did not happen for Danish sovereign debt. This decoupling between CDS rates on sovereign and private bank debt indicates that the non-bailout policies succeeded in breaking the vicious circle generated by the risks on the bank and sovereign debts. Our results are reinforced by the use of an indirect testing approach and by focusing on CDS-quantiles.

AB - We explore the interplay between sovereign and bank credit risk in a setting where Danish authorities first let two Danish banks default rather than bail them out and then left the country's largest bank, Danske Bank, to recapitalize privately. We find that the correlation between bank and sovereign credit default swap (CDS) rates changed with these events, indicating that the non-bailout decisions and recapitalization helped to curb the feedback loop between bank and sovereign risk. Following the non-bailout events, the sensitivity to external shocks declined both for Danske Bank and for Danish sovereign debt, as measured by their CDS connection with CDS rates on the European banking sector. After Danske Bank was recapitalized, its exposure to the European banking sector reappeared, while that did not happen for Danish sovereign debt. This decoupling between CDS rates on sovereign and private bank debt indicates that the non-bailout policies succeeded in breaking the vicious circle generated by the risks on the bank and sovereign debts. Our results are reinforced by the use of an indirect testing approach and by focusing on CDS-quantiles.

KW - Bailout expectation, risk, CDS, spillover, quantile regression

M3 - Working paper

T3 - CREATES Research Papers

BT - The Bank-Sovereign Nexus: Evidence from a non-Bailout Episode

PB - Institut for Økonomi, Aarhus Universitet

CY - Aarhus

ER -