Sovereign Debt Exposure and the Bank Lending Channel: Impact on Credit Supply and the Real Economy
76 Pages Posted: 27 Jan 2016 Last revised: 19 Feb 2019
Date Written: October 1, 2018
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 smaller firms.
Keywords: sovereign debt, bank lending channel, lending supply, real effects, firm investment
JEL Classification: E51, G21
Suggested Citation: Suggested Citation