A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk

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.     

The relationship between liquidity risk and credit risk in banks

This paper investigates the relationship between the two major sources of bank default risk: liquidity risk and credit risk. We use a sample of virtually all US commercial banks during the period 1998–2010 to analyze the relationship between these two risk sources on the bank institutional-level and how this relationship influences banks’ probabilities of default (PD). Our results show that both risk categories do not have an economically meaningful reciprocal contemporaneous or time-lagged relationship. However, they do influence banks’ probability of default. This effect is twofold: whereas both risks separately increase the PD, the influence of their interaction depends on the overall level of bank risk and can either aggravate or mitigate default risk. These results provide new insights into the understanding of bank risk and serve as an underpinning for recent regulatory efforts aimed at strengthening banks (joint) risk management of liquidity and credit risks.     

National politics and bank default risk in the eurozone

We study the impact of national politics on default risk of eurozone banks as measured by the stock market-based Distance to Default. We find that national electoral cycles, the power of the government as well as the government’s party ideological alignment significantly affect the stability of banks in the eurozone member countries. Moreover, we show that the impact of national politics on bank default risk is more pronounced for large as well as weakly capitalized banks.     

Bail-in vs bail-out: Bank resolution and liability structure

What is the joint impact of different resolution regimes and capital requirements on the optimal liability structure of a bank holding insured deposits and issuing non-bail-inable debt and bail-inable Tier1-capital debt? We address this novel question and find that: (1) a credible bail-in resolution regime rules out extreme leverage and creates value by postponing default; (2) a positive probability of bail-out destroys credibility with dramatic effects on financial risk-taking, to the point of reversing the classical positive link between optimal leverage and growth prospects; and (3) a strict enforcement of the Basel III CET1 capital requirement strongly mitigates the impact of a non-credible resolution regime.     

The systemic risk of European banks during the financial and sovereign debt crises

European banks became a source of risk to global financial markets during the financial crisis and attention to the European banking sector increased during the sovereign debt crisis. To measure the systemic risk of European banks, we calculate a distress insurance premium (DIP), which integrates the characteristics of bank size, probability of default, and correlation. Based on this measure, the systemic risk of European banks reached its height in late 2011 around €500 billion. We find that this was largely due to sovereign default risk. The DIP methodology is also used to measure the systemic contribution of individual banks. This approach identifies the large systemically important European banks, but Italian and Spanish banks as a group notably increased in systemic importance during the sample period. Bank-specific fundamentals like capital-asset ratios predict the one-year-ahead systemic risk contributions.     

Credit spread interdependencies of European states and banks during the financial crisis

We investigate the interdependence of the default risk of several Eurozone countries (France, Germany, Italy, Ireland, the Netherlands, Portugal, and Spain) and their domestic banks during the period between June 2007 and May 2010, using daily credit default swaps (CDS). Bank bailout programs changed the composition of both banks’ and sovereign balance sheets and, moreover, affected the linkage between the default risk of governments and their local banks. Our main findings suggest that in the period before bank bailouts the contagion disperses from bank credit spreads into the sovereign CDS market. After bailouts, a financial sector shock affects sovereign CDS spreads more strongly in the short run. However, the impact becomes insignificant in the long term. Furthermore, government CDS spreads become an important determinant of banks’ CDS series. The interdependence of government and bank credit risk is heterogeneous across countries, but homogeneous within the same country.     

Pricing Sovereign Credit Risk of Poland: Evidence from the CDS Market

We analyze the market assessment of sovereign credit risk using a reduced-form model to price the credit default swap (CDS) spreads, thus enabling us to derive values for the probability of default (PD) and loss given default (LGD) from the quotes of sovereign CDS contracts. We compare different specifications of the models allowing for both fixed and time-varying LGD, and we use these values to analyze the sovereign credit risk of Polish debt throughout the period of a global financial crisis. Our results suggest the presence of a low LGD and a relatively high PD during a recent financial crisis.     

Market‐based estimates of implicit government guarantees in European financial institutions

I exploit the price differential of credit default swap (CDS) contracts written on debts with different levels of seniority to measure the implicit government guarantees enjoyed by European financial institutions from 2005 to 2013. I determine that the aggregate guarantee increased substantially during the recent financial crises and peaked at an average of 89 bps in 2011. My analysis suggests that the extent of implicit support depends on the type of financial institutions and there exists a eurozone effect. Further investigation of feedback relationship shows that the guarantee implicitly offered by a government positively ‘Granger causes’ the sovereign's default risk.     

Sovereign Credit Risk,Banks' Government Support,and Bank Stock Returns around the World

We explore the joint effect of expected government support to banks and changes in sovereign credit ratings on bank stock returns using data for banks in 37 countries between 1995 and 2011. We find that sovereign credit rating downgrades have a large negative effect on bank stock returns for those banks that are expected to receive stronger support from their governments. This result is stronger for banks in advanced economies where governments are better positioned to provide that support. Our results suggest that stock market investors perceive sovereigns and domestic banks as markedly interconnected, partly through government guarantees.     

Systemic risk in the European sovereign and banking system

We investigate the systemic risk of the European sovereign and banking system during 2008–2013. We utilize a conditional measure of systemic risk that reflects market perceptions and can be intuitively interpreted as an entity’s conditional joint probability of default, given the hypothetical default of other entities. The measure of systemic risk is applicable to high dimensions and not only incorporates individual default risk characteristics but also captures the underlying interdependent relations between sovereigns and banks in a multivariate setting. In empirical applications, our results reveal significant time variation in systemic risk spillover effects for the sovereign and banking system. We find that systemic risk is mainly driven by risk premiums coupled with a steady increase in physical default risk.     

Bank/sovereign risk spillovers in the European debt crisis

This paper investigates contagion between bank and sovereign default risk in Europe over the period 2007–2012. We define contagion as excess correlation, i.e. correlation between banks and sovereigns over and above what is explained by common factors, using CDS spreads at the bank and at the sovereign level. Moreover, we investigate the determinants of contagion by analyzing bank-specific as well as country-specific variables and their interaction. Using the EBA’s disclosure of sovereign exposures of banks, we provide empirical evidence that three contagion channels are at work: a guarantee channel, an asset holdings channel and a collateral channel. We find that banks with a weak capital buffer, a weak funding structure and less traditional banking activities are particularly vulnerable to risk spillovers. At the country level, the debt ratio is the most important driver of contagion. Furthermore, the impact of government interventions on contagion depends on the type of intervention, with outright capital injections being the most effective measure in reducing spillover intensity.     

Banks and sovereign risk: A granular view

We investigate the determinants of sovereign bond holdings of German banks and the implications of such holdings for bank risk. We use granular information on all German banks and all sovereign debt exposures in the years 2005–2013. As regards the determinants of sovereign bond holdings of banks, we find that these are larger for weakly capitalized banks, banks that are active on capital markets, and for large banks. Yet, only around two thirds of all German banks hold sovereign bonds. Macroeconomic fundamentals were significant drivers of sovereign bond holdings only after the collapse of Lehman Brothers. With the outbreak of the sovereign debt crisis, German banks reallocated their portfolios toward sovereigns with lower debt ratios and bonds with lower yields. With regard to the implications for bank risk, we find that low-risk government bonds decreased the risk of German banks, especially for savings and cooperative banks. Holdings of high-risk government bonds, in turn, increased the risk of commercial banks during the sovereign debt crisis.     

How Much of Bank Credit Risk Is Sovereign Risk? Evidence from Europe

We examine European banks' exposures to systematic and country‐specific sovereign risk. We organize our investigation around a multifactor affine credit risk model estimated on credit default swap data of different maturities. During the 2008–15 period, about one third of banks' credit risk is sovereign. However, banks strongly differ both in the magnitude and type of their sovereign exposures. Measures of indirect exposures, such as bank size and return on equity, capture these cross‐sectional differences better than measures of direct exposures. Furthermore, the properties of the distress risk premiums turn out to be important to understand the effect of sovereign risk on bank funding costs.     

Sovereign default risk and state-dependent twin deficits

This paper analyzes the impact of the government debt-to-GDP ratio on the correlation of the fiscal balance and the current account. Above a government debt-to-GDP ratio of 90 percent the correlation of the two balances decreases by 0.16 in a sample of 12 euro area countries and by 0.17 for Greece, Ireland, Portugal and Spain. This paper develops a small open economy model with defaultable government debt and riskless international capital markets to explain the empirical evidence of a state-dependent change in the correlation. In the model high public debt-to-GDP ratios raise sovereign risk premia as the default probability increases, leading to higher uncertainty about future taxes. In this case precautionary savings of households increase and partially compensate current account deficits that result from fiscal deficits. The increase in households' saving reduces the correlation of the two balances by the same magnitude as documented in the data. The model calibrated to Greece matches further business cycle moments and the empirical default frequency.     

Implicit government guarantees and credit ratings

Exploiting the first default of a state-owned enterprise (SOE) in China, we analyze the role of implicit government guarantees in credit ratings. We consider two causes of implicit government guarantees. First, we suggest a “too big to fail” effect by revealing positive associations between credit ratings and issuer size, number of employees and taxes paid. Second, we propose a “government link” effect by showing positive associations between credit ratings and an issuer's state ownership, indicators for SOEs and central SOEs. Importantly, after the first SOE default, both dimensions of implicit government guarantees are weakened when explaining credit rating variations. Extending to analyses of yield spreads, we find that debt pricing relies more on credit ratings after the default event, consistent with bond investors weighing credit ratings more with weakened beliefs in implicit government guarantees. Collectively, our study proposes two dimensions of implicit government guarantees in credit ratings and shows how the initial SOE default significantly changes the role of such guarantees in credit ratings.     

存款保险、市场竞争与银行经营稳健性

本文基于银行存款市场空间竞争模型,探讨存款保险制度的实施效果和福利效应,及其与市场竞争政策的交互作用。研究表明,政府隐性担保尽管能够保障存款人利益,但会降低存款人对银行经营稳健性的要求,使得银行追求高风险高收益资产从而降低经营稳健性;而市场化的存款保险制度通过费率与风险挂钩的激励机制,能够有效提升银行经营稳健性,同时避免过高政策成本负担,实现较高的社会福利水平。随着市场竞争强化,引入风险差别费率保险制度,在提升银行经营稳健性和增进社会福利方面的效果逐渐增强。模型分析表明,当长期允许机构自由进出市场时,政府强化竞争政策短期可能降低银行的经营稳健性,但长期内高风险银行逐渐退出市场而更有效率的低风险银行进入市场,这种柔性市场退出机制使得银行业整体经营稳健性增强。因此,在金融市场中强化竞争政策,推行并完善当前市场化的风险差别费率存款保险制度,长期内有助于在保护存款人利益的同时,提升银行稳健性和社会福利。     

Voluntary sovereign debt exchanges

We show that some recent sovereign debt restructurings were characterized by (i) the absence of missed debt payments prior to the restructurings, (ii) reductions in the government's debt burden, and (iii) increases in the market value of debt claims for holders of the restructured debt. Since both the government and its creditors are likely to benefit from such restructurings, we label these episodes as “voluntary” debt exchanges. We present a model in which voluntary debt exchanges can occur in equilibrium when the debt level takes values above the one that maximizes the market value of debt claims. In contrast to previous studies on debt overhang, in our model opportunities for voluntary exchanges arise because a debt reduction implies a decline of the sovereign default risk. This is observed in the absence of any effect of debt reductions on future output levels. Although voluntary exchanges are Pareto improving at the time of the restructuring, we show that eliminating the possibility of conducting voluntary exchanges may improve welfare from an ex ante perspective. Thus, our results highlight a cost of initiatives that facilitate debt restructurings.     

Adaptive credit granting policies

We analyze here the optimal interest rate determination of a bank that learns about the repayment behavior of its customers from their past behavior. Optimal dynamic methods are first suggested for determining the interest rate for a bank that learns about the probability of default of its borrowers. It is shown that such a bank determines lower than or equal interest rates than a bank that does not adapt its probability of default according to its past experience. Similar results also obtain when the bank learns about the probabilities that its borrowers belong to each of K (K larger than 2) quality groups.     

企业风险异质性、贷款利率与信贷违约风险——基于银行信贷微观数据

通过某股份制商业银行2010-2015年贷款数据,讨论不同风险贷款企业、贷款利率与信贷违约之间的关系.结果表明:贷款利率与贷款违约之间呈现U型关系;高风险等级企业与贷款违约之间正相关且显著;无论是高风险等级企业还是低风险等级企业与银行贷款利率之间均呈现负相关且显著,说明贷款利率的抑制现象依然存在.从参数估计值来看,低风险等级企业贷款利率要低于高风险等级企业;高风险企业与贷款利率交叉项与违约之间呈现负相关且显著,说明高风险企业通过贷款利率渠道确实可以降低信贷违约概率.     

基于法律视角下商业银行贷款核准制的风险分析与控制

贷款担保核准制要求借款人先落实合法有效的担保并经银行核准之后,再对其发放贷款。这一制度存在许多不足之处,如贷款担保核准制容易引发担保合同法律效力的争议与纠纷,容易造成部分抵押、质押担保丧失法律效力,容易产生民事争议与纠纷,可能导致权力寻租和孳生腐败,已办理抵(质)押担保登记却未能核准放款而引起的违约纠纷等问题。鉴于此,作者提出如下风险防范建议:(1)修改现行的贷款核准制,改贷前担保核准为提款之前核准;(2)完善信贷台账管理系统;(3)允许一份合同使用两种编号;(4)尽量签订最高额担保合同;(5)修改《借款合同》附条件生效约定。