Bank Exposures and Sovereign Stress Transmission

Altavilla, Carlo; Pagano, Marco; Simonelli, Saverio

doi:10.2139/ssrn.2848937

Cited by 71 publications

(92 citation statements)

References 29 publications

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“…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 located in non-stressed countries. ese ndings are consistent with the evidence that sovereign risk weighs down on bank lending and impairs the transmission of monetary policy (Altavilla et al, 2016(Altavilla et al, , 2017Bofondi et al, 2018;De Marco, 2017;Peydro et al, 2017;Popov and Van Horen, 2015). e contribution of this paper is twofold.…”

Section: Introductionsupporting

confidence: 85%

“…raised their lending rates by more than banks with lower exposures. Similarly, Altavilla et al (2017) revealed that stressed countries banks with larger exposures to domestic sovereign debt cut lending by more than banks with minor exposures when sovereign stress increased, while expanded lending by more when sovereign stress decreased.…”

Section: Related Literaturementioning

confidence: 99%

“…Demand for and supply of credit jointly determine bank lending decisions and are both a ected by monetary, economic and nancial conditions. Moreover, sovereign stress a ects not only banks but also rms and households in stressed countries, which in turn are more likely to reduce investment and consumption than their counterparts in non-stressed countries (Altavilla et al, 2017). If this leads to systematically lower credit demand in stressed countries, it becomes hard to determine if heterogeneity in monetary transmission to credit stems from demand or supply.…”

Section: Datamentioning

confidence: 99%

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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: Introductionsupporting

confidence: 85%

Section: Related Literaturementioning

confidence: 99%

Section: Datamentioning

confidence: 99%

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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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“…Thus far both the theoretical and the empirical literatures have primarily focused on two channels to explain the depth of the crisis in Europe: a collapse in aggregate demand, partly induced by excessive household borrowing (e.g., Martin and Philippon (2017), Mian et al (2017); and Bottero et al (2019)) and weak bank-sovereign linkages, with bank balance sheets being weakened on account of large exposures to risky sovereign debt (e.g., Gennaioli et al (2014); (Acharya et al, 2014); Acharya et al (2018); Becker and Ivashina (2017); Altavilla et al (2017); Popov and Van Horen (2015); and Ongena et al (2019)). We are the first to consider the role of firm leverage in explaining the decline in firm-level and aggregate corporate investment during the European crisis.…”

Section: Introductionmentioning

confidence: 99%

Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis

Kalemli‐Özcan¹,

Laeven²,

Moreno³

2018

116

100

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We quantify the role of financial leverage behind the sluggish post-crisis investment performance of European firms. We use a cross-country firm-bank matched database to identify separate roles for firm leverage, bank balance sheet weaknesses arising from sovereign risk, and aggregate demand conditions. We find that firms with higher debt levels reduce their investment more after the crisis. This negative effect is stronger for firms holding short-term debt in countries with sovereign stress, consistent with rollover risk being an important channel influencing investment. The negative effect of firm leverage on investment is persistent for several years after the shock in the countries with sovereign stress. The corporate leverage channel can explain 40 percent of the cumulative decline in aggregate investment over four years after the crisis.

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“…They find that the bank lending channel is more effective during economic downturns and that capital adequacy helps lower the premium in downturns. Altavilla et al (2016b) investigate the causes and effects of banks' sovereign exposure during the crisis. The find that weaker banks reacted to sovereign stress by increasing their domestic sovereign holdings more than other banks as a result of moral suasion and yield-seeking.…”

Section: Related Literaturementioning

confidence: 99%

The Bank Lending Channel of Conventional and Unconventional Monetary Policy

Albertazzi¹,

Nobili

Signoretti

2016

SSRN Journal

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Using a new monthly dataset on bank-level lending rates, we study the transmission of conventional and unconventional monetary policy in the euro area via shifts in the supply of credit. We find that a bank lending channel is operational for both types of measures, though its functioning differs: for standard operations the transmission is weaker for banks with more capital and a more solid funding structure, in line with an important role of asymmetric information. However, in response to non-standard measures lending supply expands by more at banks with stronger capital and funding positions, suggesting a crucial role for regulatory and economic constraints. We also find that the transmission of unconventional measures is attenuated by their negative effect on future bank's capital position via the net interest income (reverse bank capital channel). Finally, we find that large sovereign exposures mute the response of lending rates to conventional policy, but amplify the transmission of unconventional measures.

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Bank Exposures and Sovereign Stress Transmission

Cited by 71 publications

References 29 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

Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis

The Bank Lending Channel of Conventional and Unconventional Monetary Policy

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