The Sovereign-Bank Nexus in Emerging Markets in the Wake of the COVID-19 Pandemic

Andrea Deghi, Salih Fendoglu, Tara Iyer, Hamid Tabarraei, Yizhi Xu and Mustafa Yenice

No 2022/223, IMF Working Papers from International Monetary Fund

Abstract: The COVID-19 pandemic has brought the relationship between sovereigns and banks—the so-called sovereign-bank nexus—in emerging market economies to the fore as bank holdings of domestic sovereign debt have surged. This paper examines the empirical relevance of this nexus to assess how it could amplify macro-financial stability risks. The findings show that an increase in sovereign credit risk can adversely affect banks’ balance sheets and credit supply, especially in countries with less-well-capitalized banking systems. Sovereign distress can also impact banks indirectly through the nonfinancial corporate sector by constraining their funding and reducing their capital expenditure. Notably, the effects on banks and corporates are strongly nonlinear in the size of the sovereign distress.

Keywords: Sovereign-bank nexus; emerging markets; financial stability; sovereign risk; COVID-19; banking sector; corporate investment; outcome variable; Annex I. data description; summary statistics; Emerging and frontier financial markets; Capital adequacy requirements; Commercial banks; Credit default swap; Global (search for similar items in EconPapers)
Pages: 54
Date: 2022-11-11
New Economics Papers: this item is included in nep-cba and nep-fdg
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=524070 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2022/223

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().