Sovereign risk and the bank lending channel in Europe

Cantero-Saiz, María; Azofra, Sergio Sanfilippo; Torre-Olmo, Begoña; López-Gutiérrez, Carlos

doi:10.1016/j.jimonfin.2014.04.008

Cited by 50 publications

(49 citation statements)

References 38 publications

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“…ese results contrast with evidence by Ciccarelli et al (2013) and Cantero-Saiz et al (2014), while accord to the ndings of De Santis and Surico (2013) and De Santis (2015), albeit their evidence is based on country-by-country regressions for the largest four countries in the euro area (Germany, France, Italy and Spain). e same results are found when year xed e ects are added (third column of table 3) and when monetary policy is measured by the Eonia or by Taylor residuals (fourth and h columns of table 3), suggesting the e ect is not driven by year-speci c shocks nor by the choice or potential endogeneity of the monetary policy indicator.…”

Section: Resultscontrasting

confidence: 75%

“…For instance, Ciccarelli et al (2013) estimated a VAR model over the period 2002-2011 for 12 euro area countries and found the response of bank lending to monetary policy to be stronger in sovereign stressed countries, highlighting substantial heterogeneity across countries. A similar result is found by Cantero-Saiz et al (2014) who reported that between 1999 and 2012 banks located in countries subject to sovereign stress reduced bank lending by more during policy tightening than do banks in lower sovereign risk countries. However, they nd no similar evidence when monetary policy becomes accommodating.…”

Section: Related Literaturesupporting

confidence: 83%

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Sovereign Risk and Cross-Country Heterogeneity in the Transmission of Monetary Policy to Bank Lending in the Euro Area

Grandi

2018

SSRN Journal

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Is the transmission of monetary policy to bank lending heterogeneous across euro area countries? is paper employs annual bank level data to test whether the bank lending channel of monetary policy was heterogeneous in the euro area over the period 2007-2016. To do so it follows a simple procedure that allows direct testing of how monetary policy a ected similar banks located in di erent countries. Results indicate that the transmission of monetary policy to bank lending was heterogeneous across countries that were di erently exposed to the sovereign debt crisis. On average, the same 1% cut in the policy rate led to a 1.6% increase in lending by banks located in non-stressed countries as opposed to a 0.4% increase for banks located in countries under severe sovereign stress. Unconventional monetary policy -as captured by the ECB shadow rate -was also unevenly transmi ed to bank lending. Exposure to sovereign risk is identi ed as a key source of heterogeneity. Within stressed countries, banks with larger sovereign exposures reacted to monetary easing by expanding lending by less than banks with smaller exposures. As a result, monetary accommodation was smoothly transmi ed to lending only by banks with limited exposure to sovereign risk. In response to the same 1% policy rate cut, the credit expansion of highly exposed stressed countries banks was instead 2.75% weaker than that of banks in non-stressed countries.ese ndings support existing evidence on sovereign risk having direct adverse consequences for bank lending and highlight the extent to which sovereign risk aggravated heterogeneities in the transmission on monetary policy to the real economy via the banking system during the euro area debt crisis.

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Section: Resultscontrasting

confidence: 75%

Section: Related Literaturesupporting

confidence: 83%

Sovereign Risk and Cross-Country Heterogeneity in the Transmission of Monetary Policy to Bank Lending in the Euro Area

Grandi

2018

SSRN Journal

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“…(For interpretation of the references to colour in this figure legend, the reader is referred to the web version of this article.) conditions Cantero-Saiz et al (2014),. for example, find that sovereign risk in Europe influenced bank credit supply through the bank lending channel as higher sovereign risk pushed up the cost and reduced the availability of bank funding.…”

mentioning

confidence: 99%

The macroeconomic impact of financial fragmentation in the euro area: Which role for credit supply?

Bijsterbosch

Falagiarda

2015

Journal of International Money and Finance

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“…One possible explanation for this result could be that the negative impact of home bias on the growth rate is likely to be very indirect and not to occur in the short run. In particular, Cantero-Saiz et al (2014) show that in periods of easy monetary policy, no systematic linear relationship between sovereign risk and credit supply exists in Europe. Moreover, our empirical result may relativize the extent of the financial frictions and the prominence of residents in domestic productive investment assumed in the theoretical literature (see Broner et al (2014)).…”

Section: Interpretation Of Resultsmentioning

confidence: 94%

Increase in home bias in the Eurozone debt crisis: The role of domestic shocks

2016

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Abstract:One of the most striking consequences of the recent episode of sovereign debt market stress in the Eurozone has been the increase in the share of public debt held by the domestic sector in fragile economies. However, the causes and potential consequences of this increase were only given scarce attention in the literature on the Euro area sovereign debt crisis. In order to fill this gap, we first identify the shocks that impact the variation in the share of sovereign debt held at home in an SVAR model on a sample of Eurozone countries between 2002 and 2014, distinguishing between external and domestic shocks. Thanks to several alternative tests, we show that home bias in sovereign debt responds positively to country-specific fundamentals and expectations shocks but we find no evidence that the increase in home bias is destabilizing per se in the short-run. Second, a stylized theoretical model backed by the empirical results predicts that the consequences for sovereign debt crisis depend on the relative impact of domestic initial destabilizing shocks and increased home bias. The analysis suggests that an increase in home bias in times of sovereign debt stress, despite reflecting deteriorating fiscal conditions, may make default less likely. Keywords:Eurozone, Sovereign debt crisis, Home bias, Bayesian panel SVAR JEL codes:Increase in home bias in the Eurozone debt crisis: the role of domestic shocks *Abstract: One of the most striking consequences of the recent episode of sovereign debt market stress in the Eurozone has been the increase in the share of public debt held by the domestic sector in fragile economies. However, the causes and potential consequences of this increase were only given scarce attention in the literature on the Euro area sovereign debt crisis. In order to fill this gap, we first identify the shocks that impact the variation in the share of sovereign debt held at home in an SVAR model on a sample of Eurozone countries between 2002 and 2014, distinguishing between external and domestic shocks. Thanks to several alternative tests, we show that home bias in sovereign debt responds positively to country-specific fundamentals and expectations shocks but we find no evidence that the increase in home bias is destabilizing per se in the short-run. Second, a stylized theoretical model backed by the empirical results predicts that the consequences for sovereign debt crisis depend on the relative impact of domestic initial destabilizing shocks and increased home bias. The analysis suggests that an increase in home bias in times of sovereign debt stress, despite reflecting deteriorating fiscal conditions, may make default less likely. JEL classification: E4, E5, F3, G15.Keywords: Eurozone, Sovereign debt crisis, Home bias, Bayesian panel SVAR. * We thank Stephan Sauer, Andrea Bonilla Bolaños, Aurélien Eyquem, Nicolas Houy, Bruno Ziliotto, as well as participants at the 11th Infiniti Conference, the 11th Macrofi workshop, the 2nd Finandebt Conference, the 63rd AFSE Conference and the 2nd Lyon-Tur...

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Sovereign risk and the bank lending channel in Europe

Cited by 50 publications

References 38 publications

Sovereign Risk and Cross-Country Heterogeneity in the Transmission of Monetary Policy to Bank Lending in the Euro Area

Sovereign Risk and Cross-Country Heterogeneity in the Transmission of Monetary Policy to Bank Lending in the Euro Area

The macroeconomic impact of financial fragmentation in the euro area: Which role for credit supply?

Increase in home bias in the Eurozone debt crisis: The role of domestic shocks

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