This paper introduces several measures of systemic fragility of euro area banks and sovereigns using a procedure for a consistent estimation of individual and joint default risk. Our measures not only capture the dynamic dependence between sovereigns and banks but also provide rankings of banks and sovereigns according to their systemic risk contribution by applying a leave-one-out approach and quantifying cross-sectoral contagion. Our analysis documents a rise in banking systemic fragility in the euro area from the onset of the subprime crisis, which was followed by an increase in sovereign systemic risk after Lehman Brothers filed for bankruptcy in September 2008. Our ranking measure manages to detect that Greece, Portugal and Ireland made the largest systemic fragility contributions during the sovereign debt crisis in the euro area. We also find that a hypothetical default of one of the safest countries in the euro area (eg, Germany) would have far-reaching detrimental consequences for the stability of the banking system. These results have important policy implications and add to our understanding of systemic risk of sovereigns and banks.
Journal of Risk, Vol.25, No. 2, 2022