Foreign banks and the doom loop

Ugo Albertazzi, Jacopo Cimadomo and Nicolò Maffei-Faccioli

No 2022/2, Working Paper from Norges Bank

Abstract: This paper explores whether foreign banks stabilise or destabilise lending to the real economy in the presence of sovereign stress in the domestic economy and abroad. In this context, the presence of foreign intermediaries poses a fundamental, yet unexplored, trade-off. On the one hand, domestic sovereign shocks are broadly inconsequential for the lending capacity of foreign banks, given that their funding conditions are not hampered by such shocks. On the other, these intermediaries may react more harshly than domestic banks to a deterioration in local loan risk and demand conditions, or import shocks from their own sovereign. We exploit granular and confidential data on euro area banks operating in different countries to assess this trade-off. Overall, it is found that, under certain conditions, the presence of foreign lenders stabilises lending, thus mitigating the doom loop.

Keywords: Sovereign stress; International banks; Lending activity (search for similar items in EconPapers)
JEL-codes: E5 G21 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2022-03
New Economics Papers: this item is included in nep-ifn
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https://hdl.handle.net/11250/2997492

Related works:
Working Paper: Foreign banks and the doom loop (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2022_2

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