Sovereign Risk and Bank Lending: Evidence from 1999 Turkish Earthquake

Yusuf Baskaya, Bryan Hardy, Sebnem Kalemli-Ozcan and Vivian Yue

No 22335, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use an exogenous fiscal shock to identify the transmission of government risk to bank lending due to banks holding government bonds. We illustrate with a theoretical model that for banks with higher exposure to government bonds, a higher sovereign default risk implies lower bank net worth and less lending. Our empirical estimates confirm the model’s predictions. The exogenous change in sovereign default risk of Turkish government debt as a result of the 1999 earthquake impacts banks whose balance sheets were exposed more to government bonds. The resulting lower bank net worth translates into lower credit supply. We rule out alternative explanations. Our estimates suggest this channel can explain half of the decline in bank lending following the earthquake. This underlines the importance of the bank balance-sheet channel in transmitting a higher sovereign default risk to reduced real economic activity.

JEL-codes: E0 F0 G0 G01 G21 (search for similar items in EconPapers)
Date: 2016-06
New Economics Papers: this item is included in nep-ara, nep-cwa and nep-mac
Note: IFM
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Citations: View citations in EconPapers (26)

Published as Baṣkaya, Yusuf Soner & Hardy, Bryan & Kalemli-Özcan, Ṣebnem & Yue, Vivian, 2024. "Sovereign risk and bank lending: Evidence from 1999 Turkish Earthquake," Journal of International Economics, Elsevier, vol. 150(C).

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Journal Article: Sovereign risk and bank lending: Evidence from 1999 Turkish Earthquake (2024)
Working Paper: Sovereign risk and bank lending: evidence from 1999 Turkish earthquake (2023)
Working Paper: Sovereign Risk and Bank Lending: Evidence from 1999 Turkish Earthquake (2016)
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