Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015
49 Pages Posted: 24 Jan 2019 Last revised: 21 Feb 2019
Date Written: 2018-07-12
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 banksâ€™ cross-border and cross-sector exposures. We study the impact of the credit risk on banksâ€™ balance sheets on their access to, and the price paid for, interbank liquidity, controlling for sovereign-dependence risk and lendersâ€™ liquidity shocks. We find that (i) high non-performing loan ratios on the GIIPS portfolio hinder banksâ€™ 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 sovereign-dependence and balance sheet fragmentation alike.
Keywords: interbank market, credit risk, fragmentation, sovereign risk, country risk, credit rationing, market discipline
JEL Classification: E43, E58, G01, G15, G21
Suggested Citation: Suggested Citation