This thesis investigates the impact of the banking sector risk on the sovereign credit risk, by studying the coherence in empirical data before, under and after the financial crisis. Following the financial crisis, sovereign credit risk for developed economies was for the first time coming into the limelight. Giving the complexity of these developed economies, a broader and more diversified approach to determine the sovereign credit risk is needed. Because the crisis started in the banking sector, a study of the banking sector's impact on the sovereign risk is considered being a good starting point, in order to explore the coherence of risk between state and banking sector. This is done by analyzing empirical data, collected for 18 countries in a 10 years period, from early 2004 to end-2013. The data is categorized into government related variables, banking sector related variables and macroeconomic related variables. To elucidate state and bank risk, the credit default swap is used. By setting up multiple panel regression models, respectively for the state and the banking sector, the significant variables for explaining the state risk and banking risk is found. Through this regression two state variables and one bank variable is found significant in explaining respectively state risk and bank risk. The two state variables are stat’ long-term external liabilities, as percentage of GDP, and stat’ interest expenditure to revenue. The one bank variable is banks’ liabilities to the domestic central bank, as percentage of GDP. In the final regression model the three variables are combined into one model, in order to explain the influence of state variables and bank variables on the sovereign credit risk. The results from this regression finds that bank’ liabilities to the domestic central bank is significant in explaining sovereign credit risk, as well as banking sector risk. This then means that stability in the banking sector is a fundamental factor in determining the sovereign credit risk. The model estimates that on average the banking sector underlies for 30% of the sovereign credit risk. Furthermore, in the aftermath of the financial crisis, my results suggest that the size of the relationship between state and banks is shrinking. As a consequence, the influence of the banking sector on the sovereign credit risk is reduced. The previous observed level of 30% is dropping to 17%. I conclude that when determining the sovereign debt credit risk, the banking sector's fundamental stability should be included. Because, even after having taken into account the period after the financial crisis’ top, the banking sector is an essential component in determining the sovereign credit risk.
|Educations||MSc in Finance and Accounting, (Graduate Programme) Final Thesis|
|Number of pages||91|