The sovereign-bank nexus in the euro area: financial and real channel

Mario Bellia, Ludovic Calès, Lorenzo Frattarolo, Andreea Maerean, Daniel Monteiro, Marco Petracco Giudici and Lukas Vogel

Quarterly Report on the Euro Area (QREA), 2020, vol. 19, issue 1, 45-65

Abstract: The sovereign-bank nexus played a key role in the 2010-2012 European debt crisis by enabling pernicious dynamics whereby governments and domestic banking sectors mutually weakened each other. This article reviews the direct (financial) and indirect (real) channels through which banks and sovereigns interact, and which can give rise to feedback loops between them. While significant progress has been achieved in recent years in mitigating the direct channel, its indirect mechanisms have remained largely intact. Policy options for improving the financial stability of euro area banks and sovereigns continue to be discussed in policy circles, including measures to diversify banks? sovereign debt holdings. While a review of the literature and model-based simulations do not demonstrate that diversification in itself has a clear impact on systemic risk, where it does reduce (or at least cap) total risks it can help significantly in absorbing shocks in crisis periods. Similarly, simulations show that greater cross-border integration in banking can dilute the impact of asymmetric shocks across regions in a monetary union.

Keywords: Euro area; sovereign-bank nexus; European debt crisis; he financial stability; banks? sovereign debt holdings; QUEST model; SYMBOL model (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://economy-finance.ec.europa.eu/system/files/ ... 0_en_chapter_iii.pdf (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:euf:qreuro:0191-03

Access Statistics for this article

More articles in Quarterly Report on the Euro Area (QREA) from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission Contact information at EDIRC.
Bibliographic data for series maintained by ECFIN INFO ().