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Bank Exposures and Sovereign Stress Transmission

Carlo Altavilla (), Marco Pagano () and Saverio Simonelli

Review of Finance, 2017, vol. 21, issue 6, 2103-2139

Abstract: Using novel monthly data for 226 euro-area banks from 2007 to 2015, we investigate the determinants of banks’ sovereign exposures and their effects on lending during and after the crisis. Public, bailed-out and poorly capitalized banks responded to sovereign stress by purchasing domestic public debt more than other banks, consistent with both the “moral suasion” and the “carry trade” hypothesis. Public banks’ purchases grew especially in coincidence with the largest ECB liquidity injections, which therefore reinforced the “moral suasion” mechanism. Bank exposures significantly amplified the impact of sovereign stress on bank lending to domestic firms, as well as on lending by foreign subsidiaries of stressed-country banks to firms in non-stressed countries. Altogether, our evidence connects this amplification effect and its cross-border transmission to the moral suasion exerted by domestic governments on banks during the crisis.

Keywords: Sovereign exposures; Sovereign stress; Moral suasion; Carry trade; Bank lending; Crisis (search for similar items in EconPapers)
JEL-codes: E44 F3 G01 G21 H63 (search for similar items in EconPapers)
Date: 2017
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Related works:
Working Paper: Bank Exposures and Sovereign Stress Transmission (2017) Downloads
Working Paper: Bank Exposures and Sovereign Stress Transmission (2016) Downloads
Working Paper: Bank exposures and sovereign stress transmission (2016) Downloads
Working Paper: Bank Exposures and Sovereign Stress Transmission (2016) Downloads
Working Paper: Bank exposures and sovereign stress transmission (2016) Downloads
Working Paper: Bank exposures and sovereign stress transmission (2016) Downloads
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