Bad Sovereign or Bad Balance Sheets? Euro Area Interbank Fragmentation and Monetary Policy, 2011-15
Federal Reserve Bank of Boston Working Paper
55 Pages Posted: 29 Mar 2018 Last revised: 20 Nov 2018
Date Written: November 9, 2018
Abstract
Does the funding cost differential between peripheral and non-peripheral European banks reflect poor quality of banks’ assets (credit risk)? Or the quality of sovereign support in case of failure (sovereign-dependence risk)? Combining bank-to-bank loan data with supervisory information on banks’ cross-border exposures, we disentangle the role of sovereign-dependence risk and credit risk in the euro area interbank market fragmentation from 2011 to 2015. Before the announcement of OMTs, high non-performing loan ratios on the GIIPS portfolio hindered banks’ access to the interbank market and large sovereign bond holdings raised interbank rates. The OMT and TLTROs reduced both channels of fragmentation.
Keywords: Interbank Market, Credit Risk, Fragmentation, Sovereign Risk, Credit Rationing, Market Discipline
JEL Classification: G01, E43, E58, G15, G21
Suggested Citation: Suggested Citation