Bank Exposures and Sovereign Stress Transmission
58 Pages Posted: 16 May 2016
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Bank Exposures and Sovereign Stress Transmission
Date Written: May 2016
Abstract
Using novel monthly data for 226 euro-area banks from 2007 to 2015, we investigate the causes and effects of banks' sovereign exposures during and after the euro crisis. First, in the vulnerable countries, the publicly owned, recently bailed out and less strongly capitalized banks reacted to sovereign stress by increasing their domestic sovereign holdings more than other banks, suggesting that their choices were affected both by moral suasion and by yield-seeking. Second, their exposures significantly amplified the transmission of risk from the sovereign and its impact on lending. And this amplification of the impact on lending cannot be ascribed to spurious correlation or reverse causality.
Keywords: credit risk, diabolic loop, euro debt crisis., lending, sovereign exposures, sovereign risk
JEL Classification: E44, F3, G01, G21, H63
Suggested Citation: Suggested Citation