Foreign Banks and the Doom Loop

33 Pages Posted: 26 Apr 2021

See all articles by Ugo Albertazzi

Ugo Albertazzi

ECB -DG Monetary Policy

Jacopo Cimadomo

European Central Bank

Nicolò Maffei-Faccioli

Autonomous University of Barcelona

Date Written: April 1, 2021

Abstract

This paper explores whether foreign intermediaries stabilise or destabilise lending to the real economy in the presence of sovereign stress in the domestic economy and abroad. Tensions in the government debt market may lead to serious disruptions in the provision of lending (i.e., the so-called “doom loop”). In this context, the presence of foreign banks poses a fundamental, yet unexplored, trade-off. On the one hand, domestic sovereign shocks are broadly inconsequential for the lending capacity of foreign banks, given that their funding conditions are not hampered by such shocks. On the other, these intermediaries may react more harshly than domestic banks to a deterioration in local loan risk and demand conditions. We exploit granular and confidential data on euro area banks operating in different countries to assess this trade-off. Overall, the presence of foreign lenders is found to stabilise lending, thus mitigating the doom loop.

JEL Classification: E5, G21

Suggested Citation

Albertazzi, Ugo and Cimadomo, Jacopo and Maffei-Faccioli, Nicolò, Foreign Banks and the Doom Loop (April 1, 2021). ECB Working Paper No. 2021/2540, Available at SSRN: https://ssrn.com/abstract=3834415 or http://dx.doi.org/10.2139/ssrn.3834415

Ugo Albertazzi (Contact Author)

ECB -DG Monetary Policy ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jacopo Cimadomo

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Nicolò Maffei-Faccioli

Autonomous University of Barcelona ( email )

Plaça Cívica
Cerdañola del Valles
Barcelona, Barcelona 08193
Spain

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