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Correlation of Risks between the Government and Banking Sectors: Comparison of Japan, the United States, and Europe

October 2010
Yosuke Okazaki
Financial Markets Department

Following the Lehman shock in autumn 2008, credit default swap (CDS) premiums for banks rose globally. In response to this, while governments in developed economies supported or bailed out financial institutions, they implemented a number of measures to avoid the abrupt contraction of the macroeconomy due to deleveraging in the private sector. As a result, governments' balance sheets expanded. This caused an increase in sovereign CDS premiums through the so-called"shift of risks from the private sector to the government sector." Furthermore, after April 2010, when concerns increased about the fiscal problem in Europe, the decline in government bond prices of peripheral European countries, due to the decrease in confidence in the government sector, made market participants more cautious about European financial institutions that held a large amount of such claims. This led to an increase in both bank and sovereign CDS premiums in peripheral European countries.

By examining CDS premiums for Japan, the United States, and Europe, this paper analyzes how the financial crisis, a series of policy actions, and the fiscal problem in Europe changed market participants' risk perception on the government and banking sectors, and how the perception was correlated between sectors. The analysis reveals that (1) the shift of risks from the private sector to the government sector was observed evidently in peripheral European countries, and (2) in terms of the changes in risk perception on the government and banking sectors, the spill-over effects of the fiscal problem in Europe to other regions such as the United States and Japan were relatively limited.


Bank of Japan Review is published by the Bank of Japan to explain recent economic and financial topics for a wide range of readers. This report, 2010-E-6, is a translation of the original Japanese issue, Bank of Japan Review Paper No. 2010-J-17, published in October 2010. The views expressed in the Review are those of the author and do not necessarily represent those of the Bank of Japan.

If you have comments, questions, or requests for hard copies, please contact Financial Markets Analysis Group, Coordination and Market Analysis Division, Financial Markets Department (Tel: +81-3-3279-1111 [ext. 2703]).