The zero risk fallacy? : banks' sovereign exposure and sovereign risk spillovers

Kirschenmann, Karolin ; Korte, Josef ; Steffen, Sascha

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URN: urn:nbn:de:bsz:180-madoc-438874
Document Type: Working paper
Year of publication: 2017
The title of a journal, publication series: ZEW Discussion Papers
Volume: 17-069
Place of publication: Mannheim
Publication language: English
Institution: Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
MADOC publication series: Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject: 330 Economics
Classification: JEL: G01 , G21 , G28 , G14 , G15 , F23,
Keywords (English): Sovereign debt , sovereign risk , bank risk , CDS , contagion , zero risk weight , Basel III , CRD , EBA capital exercise
Abstract: European banks are exposed to a substantial amount of risky sovereign debt. The “missing bank capital” resulting from the zero-risk weight exemption for European banks for European sovereign debt amplifies the co-movement between sovereign CDS spreads and facilitates cross-border financial-crisis spillovers. Risks spill over from risky periphery sovereigns to safer core countries, but not in the opposite direction nor for exposures to countries not exempted from risk-weighting. We consider the trade-off of benefits of sovereign debt (for banks and sovereigns) and spillover risk when applying risk-weights. More bank capital as well as positive risk-weighting for sovereign exposures mitigates spillovers.

Das Dokument wird vom Publikationsserver der Universitätsbibliothek Mannheim bereitgestellt.

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