Macroprudential Policy and the Sovereign-Bank Nexus in the Euro Area

Nikolay Hristov, Oliver Hülsewig and Benedikt Kolb

No 9342, CESifo Working Paper Series from CESifo

Abstract: We explore how changes in capital-based macroprudential regulation in the euro area affect the exposure of national banking sectors to domestic government debt, thus strengthening or weakening the sovereign-bank nexus. To do so, we construct a measure of macroprudential policy based on the Macroprudential Policy Evaluation Database (MaPPED) and estimate responses to the unsystematic component of macroprudential policy in panel vector autoregressive models for euro area ”core” and ”periphery” countries. Our main finding suggests that an unsystematic capital-based macroprudential policy tightening increases banks’ exposure to domestic sovereign bonds in the periphery countries and thus deepens the sovereign-bank nexus. By contrast, banks in the core countries expand their loan portfolios, rather than adjusting their domestic sovereign bond holdings, in response to the shock. We show that this result can be tied to the theoretical literature and investigate several transmission channels. Our results are highly robust to changes in the econometric set-up and the macroprudential indicator used.

Keywords: macroprudential policy; euro area; sovereign-bank nexus; panel vector autoregressive model (search for similar items in EconPapers)
JEL-codes: C33 G21 G28 H63 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ban, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Macroprudential policy and the sovereign-bank nexus in the euro area (2021)
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