Sovereign Debt Exposure and the Bank Lending Channel: Impact on Credit Supply and the Real Economy

82 Pages Posted: 27 Jan 2016 Last revised: 2 Dec 2019

See all articles by Margherita Bottero

Margherita Bottero

Bank of Italy

Simone Lenzu

New York University, Stern School of Business; New York University (NYU) - Stern School of Business

Filippo Mezzanotti

Kellogg School of Management - Department of Finance

Date Written: November 28, 2019

Abstract

In the context of the European crisis, we show that the security portfolio of banks plays an important role in the propagation of financial shocks across countries. Using Italian loan-level data, we show that the shock to the banks’ sovereign portfolio caused by the 2010 Greek bailout was passed on to Italian firms through a credit contraction. This was particularly the case for banks with a weaker balance sheet. The contraction in credit was similar for both large and small firms, but it only negatively affected the investment and employment decisions of small firms.

Keywords: sovereign debt, bank lending channel, lending supply, real effects, firm investment

JEL Classification: E51, G21

Suggested Citation

Bottero, Margherita and Lenzu, Simone and Mezzanotti, Filippo, Sovereign Debt Exposure and the Bank Lending Channel: Impact on Credit Supply and the Real Economy (November 28, 2019). Available at SSRN: https://ssrn.com/abstract=2722521 or http://dx.doi.org/10.2139/ssrn.2722521

Margherita Bottero (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Simone Lenzu

New York University, Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

HOME PAGE: http://simonelenzu.com

New York University (NYU) - Stern School of Business ( email )

44 West 4th Street
New York, NY 10012
United States

HOME PAGE: http://simonelenzu.com

Filippo Mezzanotti

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

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