Sovereign Risk: Characteristics, History and a Review of Recent Research
Christian Friedrich Carl Buschmann
Preface: Two economists’ views on the bank-sovereign linkage
Introduction
Assessing Country Risk: A Practical Guide
Sovereign Risk: Characteristics, History and a Review of Recent Research
The Arab Spring: Insights for Political Risk Analysis
The Eurozone Crisis: The Forgotten Risks of Private and External Debt
How the Eurozone Crisis Became a Banking Crisis, and the Risk of Japanisation
The Changing Dynamics of Country Risk
Capital Flight as a Political Risk Indicator
Debt Crisis Indicators of Emerging Markets versus Eurozone Economies
How Much Economic Capital Could European Banks Save? The Case for Optimal Sovereign Risk Allocation
Fixing Fundamental Flaws in Probabilistic Country Risk Models
Have We Learned the Country Risk Management Lessons of the 1997 Asian Financial Crisis?
Using Systems Thinking to Enhance Country Risk Assessment
Approaches to the Quantification of Country Risk
Stress Testing Across International Exposures and Activities
Prior to the global financial crisis, sovereign risk had become a tactical issue rather than a strategic one in the asset allocation process of financial institutions. One reason was that, since the turn of the millennium, banks’ practise of holding sovereign bonds has fallen into some disuse in favour of holding higher yielding corporate and bank bonds.11See Buschmann and Heidorn (2014), p 1. This practice has somehow come to seem odd since sovereign debt has, according to the Basel II rules, still a risk weighting of 0%. The reason why holding higher risk-weighted assets was favoured was the simple fact that banks had more capital available. Another reason is that global conditions were benign. Except for Japan, debt levels and deficits of advanced economies were the lowest since the collapse of Bretton Woods in the early 1970s. Likewise, the debt levels of emerging markets have shrunk to generational low levels since the turn of the millennium, while the spreads of sovereign bonds towards their respective low-risk benchmarks (eg, US Treasuries or German Bunds) have only moved in one direction: downwards.22See Frieda (2014), p 287.
A final, more historical, explanation has to
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