End of the Sovereign-Bank Doom Loop in the European Union? The Bank Recovery and Resolution Directive
In this paper we examine the relationship between the default risk of banks and sovereigns, i.e. the ‘doom-loop’. Specifically we try to assess the effectiveness of the implementation of the new recovery and resolution framework. We use a panel with daily data on European banks and sovereigns ranging from 2008 to 2016. We find that there was a pronounced feedback loop between banks and sovereigns from 2008 to 2014. However, this feedback loop seems to have disappeared after the implementation of the new regulatory framework. This finding is robust across several specifications.