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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 bankto-bank loan data with detailed supervisory information on banks' cross-border and crosssector 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.

We re-examine empirically the finance-growth relationship. We argue that financial deepening should not only be assessed via the familiar measures of financial activity output-the volume of credit-but also through its inputs-for example, the relative number of employees in the financial industry-or the efficiency of the financial-intermediation process. The latter is measured in this paper by the ratio of credit volume to the number of financial-sector employees. We compare these measures using the econometric approach recommended by Roodman (2009). Overall, we fail to find a positive relationship between financial deepening and economic growth in OECD countries over the last 40 years.(J.E.L.: G20). Paris 1 Panth eon-Sorbonne. The authors thank Agn es B enassy-Qu er e, Andrew Clark, J ezabel Couppey-Soubeyran and Val erie Mignon, as well as the referees for helpful comments. This work was carried out while the authors were affiliated to the CEPII. The usual disclaimer applies.

No 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 bankto-bank loan data with detailed supervisory information on banks' cross-border and crosssector 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.