Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/172521
Authors: 
Kirschenmann, Karolin
Korte, Josef
Steffen, Sascha
Year of Publication: 
2017
Series/Report no.: 
ZEW Discussion Papers 17-069
Abstract: 
European banks are exposed to a substantial amount of risky sovereign debt. The "missing bank capital" resulting from the zero-risk weight exemption for European banks for European sovereign debt amplifies the co-movement between sovereign CDS spreads and facilitates cross-border financial-crisis spillovers. Risks spill over from risky periphery sovereigns to safer core countries, but not in the opposite direction nor for exposures to countries not exempted from risk-weighting. We consider the trade-off of benefits of sovereign debt (for banks and sovereigns) and spillover risk when applying risk-weights. More bank capital as well as positive risk-weighting for sovereign exposures mitigates spillovers.
Subjects: 
sovereign debt
sovereign risk
bank risk
CDS
contagion
zero risk weight
Basel III
CRD
EBA capital exercise
JEL: 
G01
G21
G28
G14
G15
F23
Document Type: 
Working Paper

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