Arbeitspapier

Monetary policy, bank bailouts and the sovereign-bank risk nexus in the euro area

The paper analyses the empirical relationship between bank risk and sovereign credit risk in the euro area. Using structural VAR with daily financial markets data for 2003-13, the analysis confirms two-way causality between shocks to sovereign risk and bank risk, with the former being overall more important in explaining bank risk, than vice versa. The paper focuses specifically on the impact of non-standard monetary policy measures by the European Central Bank and on the effects of bank bailout policies by national governments. Testing specific hypotheses formulated in the literature, we find that bank bailout policies have reduced solvency risk in the banking sector, but partly at the expense of raising the credit risk of sovereigns. By contrast, monetary policy was in most, but not all cases effective in lowering credit risk among both sovereigns and banks. Finally, we find spillover effects in particular from sovereigns in the euro area periphery to the core countries.

Language
Englisch

Bibliographic citation
Series: DIW Discussion Papers ; No. 1448

Classification
Wirtschaft
Monetary Policy
General Financial Markets: General (includes Measurement and Data)
Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Subject
credit risk
banks
sovereigns
monetary policy
bank bailout
heteroscedasticity
spillovers

Event
Geistige Schöpfung
(who)
Fratzscher, Marcel
Rieth, Malte
Event
Veröffentlichung
(who)
Deutsches Institut für Wirtschaftsforschung (DIW)
(where)
Berlin
(when)
2015

Handle
Last update
10.03.2025, 11:45 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Fratzscher, Marcel
  • Rieth, Malte
  • Deutsches Institut für Wirtschaftsforschung (DIW)

Time of origin

  • 2015

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