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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