Sovereign Credit Risk, Banks' Government Support, and Bank Stock Returns around the World

We explore the joint effect of expected government support to banks and changes in sovereign credit ratings on bank stock returns using data for banks in 37 countries between 1995 and 2011. We find that sovereign credit rating downgrades have a large negative effect on bank stock returns for those b...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2014-02, Vol.46 (s1), p.93-121
Main Authors: CORREA, RICARDO, LEE, KUAN-HUI, SAPRIZA, HORACIO, SUAREZ, GUSTAVO A.
Format: Article
Language:English
Subjects:
Bank assets
Bank markets
Bank ratings
bank stock returns
Bank stocks
Banking
Banking crises
Banks
Credit rating
Credit ratings
Data analysis
G14
G21
G24
Government
government guarantees
Guaranteed loans
H63
Investors
Rates of return
Securities markets
sovereign bond
Stock exchange
Stock market indices
Stock returns
Studies
Support columns
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Summary:We explore the joint effect of expected government support to banks and changes in sovereign credit ratings on bank stock returns using data for banks in 37 countries between 1995 and 2011. We find that sovereign credit rating downgrades have a large negative effect on bank stock returns for those banks that are expected to receive stronger support from their governments. This result is stronger for banks in advanced economies where governments are better positioned to provide that support. Our results suggest that stock market investors perceive sovereigns and domestic banks as markedly interconnected, partly through government guarantees.
ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.12080