Sovereign Risk and Deposit Dynamics: Evidence from Europe

Nonresident Capital Flows and Volatility

“…By generating a more diversified investor base and stronger overall demand for sovereign securities, foreign investment typically results in lower yields and deeper liquidity. In addition, the presence of nonresident investors helps reduce the direct link between domestic financial institutions and government and through that reduce their vulnerability to sovereign risk, with implications for both the asset and liability sides of the financial institutions' balance sheet (e.g., Grigorian and Manole, 2017). However, this may come at the expense of greater (price and exchange rate) volatility, resulting in a tradeoff between (lower) yields and (higher) volatility.…”

Managing the Sovereign-Bank Nexus

“…As spreads on distressed debt rose toward the end of 2010, banks with substantial holdings of such debt reduced syndicated lending by 21.3 percent relative to banks with marginal holdings of it (Popov and van Horen 2015). In related work, Grigorian and Manole (2017) found that banks more exposed to sovereign risk (as measured by a higher relative frequency of press reports mentioning both the name of the bank and wording related to sovereign risk) find it harder to attract deposits. In turn this may affect their cost of funding and their ability to extend loans (this evidence is also consistent with the safety net channel discussed in the next section).…”

Deposit insurance, remittances, and dollarization: Survey‐based evidence from a top remittance‐receiving country

“…The 2008 global financial crisis and its aftermath in Europe tested the trustworthiness and reliability of DI schemes. Banking sectors of some (core and noncore) EU countries experienced massive deposit outflows despite fairly generous deposit protection schemes in place (Grigorian & Manole, ). And although arguably no DI scheme is designed to provide guarantee against a systemic crisis, in some cases, DI schemes were not seen as sufficiently credible to help avoid even individual bank runs (e.g., the case of Northern Rock in UK in 2007).…”