A Study On The Relationship Between European Sovereign Debt Crisis And Bank Risks

The US subprime crisis,which broke out in 2007,soon escalated into a global phenomenon that weakened the world's financial markets and threatened the global economy.In the early stages of the crisis,the United States relatively controlled the financial situation and had the least spillover effect on the European economies.Between 2007 and 2008,a number of international banks and institutions fell into the brink of collapse,greatly increasing the tensions in world financial markets.In July 2007,Standard&Poor's issued a credit surveillance alert for Mortgage-Backed Securities,after which major European banks' credit default swaps spreads increased significantly.However,at this stage,investors still have not paid much attention to European sovereign credit risk because the sovereign CDS premium level is still low.After that,Lehman Brothers bankruptcy is a turning point in market sentiment,sovereign credit risk quickly became the focus of many European countries.This paper examines the two-way relationship between banks risk and sovereign debt crises.According to Bolton and Jeanne(2011)study of financial institutions and government departments to expand the model for the theoretical basis.The model suggests that sovereign defaults can trigger a banking crisis when banks hold large amounts of government bonds.However,a large number of direct bailouts or clear bank guarantees may limit the short-term liquidity of government departments and trigger a sovereign debt crisis.An empirical analysis of the use of credit default swaps spreads in 11 European countries and 26 European commercial banks between 2006 and 2015 supports this theory.First,there was a minimal synergistic relationship between the CDS spreads at the national level and the sovereign CDS spreads before the financial crisis.After the outbreak of the subprime crisis,the correlation increased significantly and then fell sharply until the Greek debt crisis broke out.Second,the same set of global risk factors can explain the changes in bank CDS spreads and sovereign CDS spreads after 2007,which are more sensitive to the financial sector.Finally,the study of price dynamics shows that bank CDS spreads dominated before Lehman Brothers went bankrupt,but was gradually replaced by sovereign CDS spreads during the eurozone debt crisis.This suggests that investors interpret sovereign credit risk as the main source of bank risk and hedge financial risks through trading sovereign CDS contracts.Bank guarantees and bailouts have contributed to the deterioration of the financial situation,leading to a reverse spillover effect from sovereignty to the financial sector.The innovation of this paper is to use credit default swap spread to measure sovereign risk and bank risk,to explore the relationship between the two,and draw the relevant conclusions.In September 2016,the Chinese market reintroduced the business system of credit risk mitigation tools,which was of great significance to China from the new perspective on the study of sovereign risk and bank risk.