The impact of sovereign tensions on bank lending: identifying the channels at work

Fabiana Sabatini ()
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Fabiana Sabatini: Bank of Italy

No 1397, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Banks’ holdings of sovereign bonds are an important component of the multifaceted bank-sovereign nexus. This paper exploits the unexpected increase in sovereign yields in Italy in May 2018 to quantify the impact of a drop in value of banks’ government bond portfolios on their supply of loans (direct channels). It disentangles the effect stemming from the worsening in banks’ capitalization (balance sheet channel) from that associated with a reduced ability to raise funds using government bond holdings as collateral (liquidity channel). Results show that banks with large government bond portfolios reduced their lending more; evidence indicates that this is a consequence of the balance-sheet channel. The liquidity channel was not activated, partly thanks to the ample availability of Eurosystem funds held by banks. I then control for the channels at work for the banking system as a whole, regardless of government bond holdings (indirect channels), and find that the generalized increase in the cost of funding for banks (cost of funding channel) has a negative impact on bank lending.

Keywords: credit supply; banks’ sovereign holdings; bank lending channel (search for similar items in EconPapers)
JEL-codes: E5 E51 G01 G21 (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-ban and nep-eec
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1397_22

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