Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/181439
Authors: 
Acharya, Viral V.
Gündüz, Yalin
Johnson, Tim
Year of Publication: 
2018
Series/Report no.: 
Bundesbank Discussion Paper 26/2018
Abstract: 
Using a comprehensive dataset from German banks, we document the usage of sovereign credit default swaps (CDS) during the European sovereign debt crisis of 2008-2013. Banks used the sovereign CDS market to extend, rather than hedge, their long exposures to sovereign risk during this period. Lower loan exposure to sovereign risk is associated with greater protection selling in CDS, the effect being weaker when sovereign risk is high. Bank and country risk variables are mostly not associated with protection selling. The findings are driven by the actions of a few non-dealer banks which sold CDS protection aggressively at the onset of the crisis, but started covering their positions at its height while simultaneously shifting their assets towards sovereign bonds and loans. Our findings underscore the importance of accounting for derivatives exposure in building a complete picture and understanding fully the economic drivers of the bank-sovereign nexus of risk.
Subjects: 
Credit derivatives
Credit default swaps
Sovereign credit risk
Eurozone
Sovereign debt crisis
Depository Trust and Clearing Corporation (DTCC)
JEL: 
G01
G15
G21
H63
ISBN: 
978-3-95729-479-1
Document Type: 
Working Paper

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