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A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk

The Journal of finance (New York), 2014-12, Vol.69 (6), p.2689-2739 [Peer Reviewed Journal]

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Title:
A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk
Author: ACHARYA, VIRAL ; DRECHSLER, ITAMAR ; SCHNABL, PHILIPP
Subjects: Bailouts ; Bank assets ; Bank credit ; Banking crises ; Banks ; Credit default swaps ; Credit market ; Credit risk ; Debt ; Economic models ; Europe ; Financial bailouts ; Financial management ; Financial services ; Financial theory ; Government bonds ; Risk theory ; Sovereign debt ; Studies ; Tax revenues
Is Part Of: The Journal of finance (New York), 2014-12, Vol.69 (6), p.2689-2739
Description: We model a loop between sovereign and bank credit risk. A distressed financial sector induces government bailouts, whose cost increases sovereign credit risk. Increased sovereign credit risk in turn weakens the financial sector by eroding the value of its government guarantees and bond holdings. Using credit default swap (CDS) rates on European sovereigns and banks, we show that bailouts triggered the rise of sovereign credit risk in 2008. We document that post-bailout changes in sovereign CDS explain changes in bank CDS even after controlling for aggregate and bank-level determinants of credit spreads, confirming the sovereign-bank loop.
Publisher: Cambridge: Blackwell Publishing Ltd
Language: English
Identifier: ISSN: 0022-1082
EISSN: 1540-6261
DOI: 10.1111/jofi.12206
CODEN: JLFIAN
Source: Alma/SFX Local Collection

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