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The impact of sovereign credit risk on bank funding conditions

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  • Bank for International Settlements

Abstract

Sovereign credit risk is currently a significant issue for European banks and over coming years may have implications for global financial stability. This report examines the relationship between sovereign credit risk and bank funding conditions, how banks might respond to an environment of ongoing elevated sovereign risk and the implications for policy makers. It was prepared by a Study Group chaired by Fabio Panetta from the Bank of Italy. The report concludes that increases in sovereign credit risk push up the cost and weaken the composition of banks' funding, and that banks cannot fully insulate themselves by adjusting their operations. As a consequence, the official sector has a key role in minimising the impact of weaker public finance conditions on banks, but there are trade-offs. First and foremost, governments need to maintain sound public finance conditions. Bank supervisors should also closely monitor the interaction of sovereign risk with regulatory policies that encourage banks to hold large quantities of public debt. Central banks might also consider having flexible collateral frameworks that, during severe crises, allow funding to be supplied against a broad range of collateral, but this is not costless, and hence should be used sparingly and with appropriate safeguards in place.

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Bibliographic Info

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This book is provided by Bank for International Settlements in its series CGFS Papers with number 43 and published in 2011.

ISBN: 92-9131-879-5
Handle: RePEc:bis:biscgf:43

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References

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Citations

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Cited by:
  1. Masciantonio, Sergio & Tiseno, Andrea, 2012. "The rise and fall of universal banking: ups and downs of a sample of large and complex financial institutions since the late ‘90s," MPRA Paper 42494, University Library of Munich, Germany.
  2. Fulli-Lemaire, Nicolas, 2013. "A Tale of Two Eurozones: Banks’s Funding, Sovereign Risk & Unconventional Monetary Policies," MPRA Paper 49072, University Library of Munich, Germany.
  3. Benjamin Käfer & Jochen Michaelis, 2012. "Länderrisiko: Die ökonomischen Konsequenzen einer Herabstufung durch die Ratingagenturen," Wirtschaftsdienst, Springer, Springer, vol. 92(2), pages 95-100, February.
  4. Gajewski, Krzysztof & Olszewski, Krzysztof & Pawłowska, Małgorzata & Rogowski, Wojciech & Tchorek, Grzegorz & Zięba, Jolanta, 2012. "Integracja finansowa w Europie po wprowadzeniu euro. Przegląd literatury
    [Financial integration in Europe after the introduction of the euro. A literature overview]
    ," MPRA Paper 42482, University Library of Munich, Germany.
  5. Panetta, Fabio & Correa, Ricardo & Davies, Michael & Di Cesare, Antonio & Marques, José-Manuel & Nadal de Simone, Francisco & Signoretti, Federico & Vespro, Cristina & Vildo, Siret & Wieland, Martin , 2011. "The impact of sovereign credit risk on bank funding conditions," MPRA Paper 32581, University Library of Munich, Germany.
  6. CRISTE Adina & LUPU Iulia, 2013. "The Conflict Relation Between the Sovereign Debt of the Euro Area Countries and the Common Monetary Policy As a Potential Source For Geopolitical Changes," Anale. Seria Stiinte Economice. Timisoara, Faculty of Economics, Tibiscus University in Timisoara, Faculty of Economics, Tibiscus University in Timisoara, vol. 0, pages 167-173, May.

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