cover_journal-of-financial-stability.gif

Avoiding the Fall into the Loop: Isolating the Transmission of Bank-to-Sovereign Distress in the Euro Area

While the sovereign-bank loop literature has demonstrated the amplification between sovereign and bank risks in the Euro Area, its econometric identification is vulnerable to reverse causality and omitted variable biases. We address the loop's endogenous nature and isolate the direct bank-to-sovereign distress channel by exploiting the global, non-Eurozone related variation in banks’ stock prices. We instrument banking sector stock returns in the Eurozone with exposure-weighted stock market returns from non-Eurozone countries and take further precautions to remove Eurozone-related variation. We find that the transmission of instrumented bank distress to sovereign distress is around 50% smaller than the corresponding coefficient in the unadjusted OLS framework, confirming concerns on endogeneity. Despite the smaller relative magnitude, increasing instrumented bank distress is found to be an economically and statistically significant cause for rising sovereign fragility in the Eurozone.

15. Dezember 2020

Autoren Stefan Eichler Hannes Böhm

Ansprechpartner

Für Wissenschaftler/innen

Professor Dr. Stefan Eichler
Professor Dr. Stefan Eichler
Forschungsgruppenleiter

Für Rückfragen stehe ich Ihnen gerne zur Verfügung.

Anfrage per E-Mail

Für Journalistinnen/en

Mitglied der Leibniz-Gemeinschaft LogoTotal-Equality-LogoWeltoffen Logo