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

Gori, Filippo (2018): 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 standoff over the rise of the US debt ceiling to characterise an instrument that is then used to estimate the impact of sovereign on bank credit risk. Results show that a 100 basis points increase in the US sovereign default risk implies a 41 basis points increase in bank credit risk; this effect is about three times larger than the corresponding effect of bank default risk on sovereign’s. Finally, calculation suggest that during the first 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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