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Dissecting the ‘doom loop’: the bank-sovereign credit risk nexus during the US debt ceiling crisis

Gori, Filippo (2019): Dissecting the ‘doom loop’: the bank-sovereign credit risk nexus during the US debt ceiling crisis.

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Abstract

Political events matter in economics. This paper uses the 2011 political stando� over the rise of the US debt ceiling to characterise an instrument that is then used to estimate the impact of sovereigns' on bank credit risk. Results show that a 100 basis points increase in US sovereign default risk produces a 41 basis points increase in bank credit risk; this e�ect is about three times larger than the corresponding e�ect of bank default risk on sovereigns'. Finally, calculations suggest that during the �rst two quarters of 2011, as a consequence of the debt ceiling crisis, US bank funding costs increased by approximately 18 basis points.

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