Download This PaperDoes Quantitative Easing Mitigate the Sovereign-Bank Nexus?
38 Pages Posted: 8 Jan 2021
Date Written: January 6, 2021
Abstract
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: Suggested Citation
Alexander Bechtel (Contact Author)
University of St. Gallen - School of Finance ( email )
Unterer Graben 21
St.Gallen, CH-9000
Switzerland
Angelo Ranaldo
University of St. Gallen ( email )
School of Finance
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)
HOME PAGE: http://fin-sr.unisg.ch
Swiss Finance Institute ( email )
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