Sovereign-bank Nexus in the Eurozone during the Covid-19 crisis

Abstract

In this thesis, I investigate the connection between bank and sovereign credit risk during the COVID-19 crisis. In the first part of the thesis, I provide an overview of the European sovereign debt crisis and the subsequent policy responses from the perspective of the sovereign-bank nexus, contrasted with the COVID-19 crisis. Then, I estimate the strength of the sovereign-bank nexus using panel regression models on bank and sovereign CDS spreads, employing a dataset of 23 banks and 11 Eurozone countries between 2018 and 2022 February. I investigate the hypothesis that there was a significant connection between bank and sovereign credit risk preceding and during the crisis and that the strength of the relationship declined during the second half of the crisis. Consistent with the hypothesis, I find that the nexus between sovereign and bank credit risk has declined after February 2020, the official outbreak of the crisis. The relationship was, however, still significant on average in the Eurozone countries during the sample period. Moreover, results arising from country subsamples suggest that the nexus was present primarily in the peripheric (rather than the core) countries of the Eurozone.

Date of Award	2022
Original language	English
Supervisor	Ibolya Schindele (Supervisor)