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Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015

Silvia Gabrieli and Claire Labonne

Working papers from Banque de France

Abstract: We measure the relative role of sovereign-dependence risk and balance sheet (credit) risk in euro area interbank market fragmentation from 2011 to 2015. We combine bank-to-bank loan data with detailed supervisory information on banks’ cross-border and cross-sector exposures. We study the impact of the credit risk on banks’ balance sheets on their access to, and the price paid for, interbank liquidity, controlling for sovereign-dependence risk and lenders’ liquidity shocks. We find that (i) high non-performing loan ratios on the GIIPS portfolio hinder banks’ access to the interbank market throughout the sample period; (ii) large sovereign bond holdings are priced in interbank rates from mid-2011 until the announcement of the OMT; (iii) the OMT was successful in closing this channel of cross-border shock transmission; it reduced sovereigndependence and balance sheet fragmentation alike.

Keywords: Interbank market; credit risk; fragmentation; sovereign risk; country risk; credit rationing; market discipline (search for similar items in EconPapers)
JEL-codes: G01 E43 E58 G15 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:687

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