Banking crises have been largely associated with large output and welfare losses, and bank bailouts by the public sector are a recurring feature of financial crises. Such stylized facts underscore the importance of a well-functioning financial system for attaining economic stability and growth, as well as the relevance of understanding the relationship between the economic conditions faced by the government and the
banking sector. In particular, differences and changes in explicit (and implicit) government support to banks may affect investors’ incentives to hold bank stocks, and thus impact banks’ external financing costs, which may send ripples through the rest of the economy. Similarly, sovereign debt rating changes may unveil new information about a country’s fundamentals, generating a significant externality for the country’s banking system, and thus they also affect investors’ incentives to hold bank stocks. We explore the joint impact of sovereign debt rating changes and government support on bank stock returns from 36 countries between 1995 and 2011. Our findings show that sovereign rating changes have a significant and robust impact on bank stock returns. The impact is nonlinear and varies across banks and countries. Moreover, we find that the effect is asymmetric and stronger for downgrades than for upgrades, and that large downgrades have a particularly strong negative impact on returns. Importantly, this result is significantly stronger for banks with more ex-ante government support, providing evidence that investors perceive sovereigns and domestic banks as markedly interconnected.
Keywords: sovereign bond; credit rating;banks stock returns; government guarantee
JEL Classification: G21, G24, H63, G14
학회소식
[2012년 제 4차] Sovereign credit risk, banks’ government support, a
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2012-12-12
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