Covid, central banks and the bank-sovereign nexus

Bryan Hardy and Sonya Zhu

BIS Quarterly Review, 2023

Abstract: The Covid–19 outbreak strongly affected the evolution of the bank–sovereign nexus. In advanced economies, banks played an important role in financing sovereign debt during the first two quarters of 2020 but their participation fell in subsequent quarters. Correspondingly, the share of sovereign debt in banks' portfolios declined. In contrast, central bank reserves soared due to asset purchase and funding–for–lending programmes. In emerging market economies, the rise in banks' holdings of sovereign debt started before the Covid–19 outbreak and accelerated thereafter. From a longer–term perspective, the perceived credit risk of banks tends to co–move more strongly with that of sovereigns when the share of sovereign debt on banks' balance sheets is higher or – keeping this share constant – when the share of reserves is lower

JEL-codes: E58 F34 G21 G32 H63 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (5)

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