Does Quantitative Easing Mitigate the Sovereign-Bank Nexus?

38 Pages Posted: 8 Jan 2021

See all articles by Alexander Bechtel

Alexander Bechtel

University of St. Gallen - School of Finance

Jens Eisenschmidt

Morgan Stanley

Angelo Ranaldo

University of St. Gallen; Swiss Finance Institute

Date Written: January 6, 2021


The credit risk of the sovereign affects the financial health of its banking sector and vice versa, creating an adverse feedback loop known as “sovereign- bank nexus”. We show that Quantitative Easing can effectively mitigate the sovereign-bank nexus. Our results indicate that the ECB’s Public Sector Purchase Programme reduced the co-movement of sovereign and bank credit risk by almost 80%. The mitigation is driven by the euro area periphery and works through three channels: (i) a reduction in government bond holdings of banks, (ii) an increase of government bond prices, and (iii) an increase in excess liquidity holdings of banks.

Keywords: Sovereign-bank nexus, quantitative easing, Public Sector Purchase Programme, financial stability

JEL Classification: E52, G10, E60, G21

Suggested Citation

Bechtel, Alexander and Eisenschmidt, Jens and Ranaldo, Angelo, Does Quantitative Easing Mitigate the Sovereign-Bank Nexus? (January 6, 2021). University of St.Gallen, School of Finance Research Paper No. 2021/01, Available at SSRN: or

Alexander Bechtel (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000

Jens Eisenschmidt

Morgan Stanley ( email )

1585 Broadway
New York, NY 10036
United States

Angelo Ranaldo

University of St. Gallen ( email )

School of Finance
Unterer Graben 21
St. Gallen, 9000
+41712247010 (Phone)


Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
+41796637711 (Phone)


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