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An Empirical Study of International Spillover of Sovereign Risk to Bank Credit Risk
Author(s) -
Poon Winnie P. H.,
Shen Jianfu,
Burnett John E.
Publication year - 2017
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12114
Subject(s) - downgrade , sovereign credit , credit rating , credit risk , spillover effect , business , financial system , asset (computer security) , sovereignty , monetary economics , economics , finance , credit default swap , computer security , politics , computer science , political science , microeconomics , law
The severity and complexity of the recent financial crisis has motivated the need for understanding the relationships between sovereign ratings and bank credit ratings. This is the first study to examine the impact of the “ international ” spillover of sovereign risk to bank credit risk through both a ratings channel and an asset holdings channel. In the first case, the downgrade of sovereign ratings in GIIPS (Greece, Italy, Ireland, Portugal, and Spain) countries leads to rating downgrades of banks in the peripheral countries. The second channel indicates that larger asset holdings of GIIPS debt increases the credit risk of cross‐border banks, and hence, the probabilities of downgrade.