Foreign banks and the doom loop

Ugo Albertazzi, Jacopo Cimadomo and Nicolò Maffei-Faccioli ()

No 2540, Working Paper Series from European Central Bank

Abstract: This paper explores whether foreign intermediaries stabilise or destabilise lending to the real economy in the presence of sovereign stress in the domestic economy and abroad. Tensions in the government debt market may lead to serious disruptions in the provision of lending (i.e., the so-called “doom loop”). In this context, the presence of foreign banks poses a fundamental, yet unexplored, trade-off. On the one hand, domestic sovereign shocks are broadly inconsequential for the lending capacity of foreign banks, given that their funding conditions are not hampered by such shocks. On the other, these intermediaries may react more harshly than domestic banks to a deterioration in local loan risk and demand conditions. We exploit granular and confidential data on euro area banks operating in different countries to assess this trade-off. Overall, the presence of foreign lenders is found to stabilise lending, thus mitigating the doom loop. JEL Classification: E5, G21

Keywords: international banks; lending activity; sovereign stress (search for similar items in EconPapers)
Date: 2021-04
New Economics Papers: this item is included in nep-eec and nep-fdg
Note: 451871
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Working Paper: Foreign banks and the doom loop (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20212540

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