Browsing by Subject "Staatsrisiko"

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Sovereign and bank risk : contagion, policy uncertainty and interest rates
(2024) Bales, Stephan; Burghof, Hans-Peter
This dissertation addresses the dependence between sovereign and bank default risk and the importance of policy uncertainty and interest rates for this nexus. To this end, the thesis includes four self-contained but interrelated studies with different methodological approaches. The first paper sheds light on the cross-country contagion of sovereign and bank default risk between 2009 and 2021 to assess the introduction of the European Banking Union in 2014. Based on Credit Default Swap premia of systemically important banks in the 10 largest eurozone countries, the estimated network structures provide evidence that the introduction of the Single Supervisory Mechanism, as part of the European Banking Union, has been effective in reducing overall financial contagion in the short run (up to 1 month). In the long run, the risk dependence is still very pronounced. Nevertheless, a shock in sovereign or bank risk is less severely transmitted to other eurozone countries after 2014, indicated by lower volatility spillovers. Thus, the Banking Union supports financial stability by weakening the strength of dependence rather than eliminating the dependence itself. The second study takes a closer look at the domestic dependence between sovereign and bank risk in 14 countries. The estimation of dynamic conditional correlations indicates that the dependence is significantly higher in euro member states. This reveals a systematic eurozone risk factor mainly rooted in the home bias of domestic sovereign bond holdings of eurozone banks. Moreover, fixed-effect panel regressions indicate that the sovereign-bank correlation increases in times of great policy uncertainty, high interbank market rates, low bank lending margins, and a low ratio of core bank capital. Economically, banks with a low level of core equity capital are less capable of withstanding shocks to their balance sheets, which spills over to the state and results in higher risk dependence. In addition, banks charge each other higher rates for short-term lending during times of financial distress. In this way, bank liquidity issues and lending aversion in the interbank market are passed on to other banks and ultimately to the sovereign. Overall, the second study emphasizes the importance of bank capital adequacy regulations and joint European policies to mitigate domestic sovereign-bank dependencies. The third study extends prior results and examines the impact of economic policy uncertainty (EPU) on the sovereign-bank nexus by introducing a continuous wavelet time domain. This setting allows to derive causal lead-lag relationships for each point in time. The assessment of the lead-lag relationships in 10 countries shows that a higher level of sovereign default risk leads to an increase in bank risk in the short horizon. In the medium run (6-32 months), the relationship reverses and the default risk of banks determines sovereign risk. Once the influence of policy uncertainty on sovereign and bank risk is eliminated, the partial coherency shows that the sovereign-bank dependence significantly weakens. This reveals the great relevance of political risk factors for the sovereign-bank nexus. The final study addresses the impact of different sources of uncertainty. Besides newspaper-based economic policy uncertainty, the study employs the implied volatility of options written on the S&P500 and a Twitter-based uncertainty index. Based on stock returns of the 22 largest U.S. banks, the computation of principal components, Granger causality, and volatility spillover provides evidence that EPU and Twitter-based uncertainty capture different sources of investor perception in the very short horizon (up to 1 week). Twitter captures consumer uncertainty more appropriately in the short run than newspapers, which usually have a delay in responding to news due to editorial processes. In addition, the study reveals that the impact of uncertainty is considerably stronger for banks with a high ratio of loans to total assets and a large ratio of derivatives to total bank assets. Moreover, banks with a greater loan ratio face a higher level of credit risk. Assuming that bank risk can be transmitted to the state through the sovereign-bank nexus, the results emphasize the importance of differentiating between the sources of uncertainty to evaluate its implications for financial stability. The findings also highlight the increasing importance of social media for the financial markets.