The repo channel of cross-border lending in the European sovereign debt crisis

Jaime Luque

Journal of Financial Markets, 2022, vol. 59, issue PA

Abstract: I build an equilibrium model of cross-border lending to understand how shocks to repo funding and leverage induce banks to reallocate credit by region and asset type during the European sovereign debt crisis of 2010–2013. A higher collateral risk on lower-rated sovereigns induces banks to fly to liquid collateral. Banks in the periphery sovereign crisis region with worse funding conditions rebalance their loan portfolios toward risky illiquid sovereigns. The European Central Bank’s Long Term Refinancing Operations program stands as a mechanism whereby optimistic banks carried out the successful policy of the ECB to tamp down euro redenomination risk.

Keywords: Repo funding; Sovereign collateral; Banks; Cross-border lending; European sovereign debt crisis (search for similar items in EconPapers)
JEL-codes: D53 F34 F36 G11 G12 G18 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:59:y:2022:i:pa:s1386418121000574

DOI: 10.1016/j.finmar.2021.100679

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