Sovereign default risk affects bank assets – Bank of Italy paper

The Bank of Italy

Markets place premiums on the assets of banks based in countries seen as being at risk of sovereign default, a working paper published by the Bank of Italy finds.

In Risky bank guarantees, Taneli Mäkinen, Lucio Sarno and Gabriele Zinna use a dataset on bank asset returns for 15 countries from 2004–18. They apply standard portfolio-sort techniques to analyse the data, ranking banks first by their risk and then by the deposit-to-GDP ratio.

This ranking, the authors argue, gives them “a measure

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