Working Paper

End of the Sovereign-Bank Doom Loop in the European Union? The Bank Recovery and Resolution Directive

Publication Date

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.