Bank Exposures and Sovereign Stress Transmission

Review of Finance

54 Pages Posted: 6 Aug 2015 Last revised: 13 Aug 2017

See all articles by Carlo Altavilla

Carlo Altavilla

European Central Bank (ECB)

Marco Pagano

University of Naples Federico II - Department of Economics and Statistics; Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Saverio Simonelli

University of Naples Federico II - Department of Economics and Statistics; Centre for Studies in Economics and Finance (CSEF)

Multiple version iconThere are 3 versions of this paper

Date Written: August 12, 2017

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 tramission to the moral suasion exerted by domestic governments on banks during the crisis.

Keywords: sovereign exposures, sovereign risk, bank lending, credit risk, euro, crisis

JEL Classification: E44, F3, G01, G21, H63

Suggested Citation

Altavilla, Carlo and Pagano, Marco and Simonelli, Saverio, Bank Exposures and Sovereign Stress Transmission (August 12, 2017). Review of Finance. Available at SSRN: https://ssrn.com/abstract=2640131 or http://dx.doi.org/10.2139/ssrn.2640131

Carlo Altavilla

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Marco Pagano (Contact Author)

University of Naples Federico II - Department of Economics and Statistics ( email )

Via Cintia - Monte S. Angelo
Napoli, 80126
Italy
+39 081 675306 (Phone)
+39 081 7663540 (Fax)

Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Einaudi Institute for Economics and Finance (EIEF)

Via Sallustiana, 62
Rome, 00187
Italy

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

Saverio Simonelli

University of Naples Federico II - Department of Economics and Statistics ( email )

Via Cinthia - Monte S. Angelo
Napoli, Napoli 80126
Italy
0039 081 675366 (Phone)

HOME PAGE: http://www.csef.it/Simonelli

Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia - Monte S. Angelo
Napoli, 80126
Italy

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