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

See all articles by Silvia Gabrieli

Silvia Gabrieli

Banque de France

Claire Labonne

Federal Reserve Banks - Federal Reserve Bank of Boston

Multiple version iconThere are 2 versions of this paper

Date Written: 2018-07-12

Abstract

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 banks’ cross-border and cross-sector exposures. We study the impact of the credit risk on banks’ balance sheets on their access to, and the price paid for, interbank liquidity, controlling for sovereign-dependence risk and lenders’ liquidity shocks. We find that (i) high non-performing loan ratios on the GIIPS portfolio hinder banks’ 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

Gabrieli, Silvia and Labonne, Claire, Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015 (2018-07-12). FRB Boston Risk and Policy Analysis Unit Paper No. RPA 18-3. Available at SSRN: https://ssrn.com/abstract=3321603

Silvia Gabrieli (Contact Author)

Banque de France ( email )

Paris
France

Claire Labonne

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

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