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The impact of sovereign tensions on bank lending: identifying the channels at work

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  • Fabiana Sabatini

    (Bank of Italy)

Abstract

Banks’ holdings of sovereign bonds are an important component of the multifaceted bank-sovereign nexus. This paper exploits the unexpected increase in sovereign yields in Italy in May 2018 to quantify the impact of a drop in value of banks’ government bond portfolios on their supply of loans (direct channels). It disentangles the effect stemming from the worsening in banks’ capitalization (balance sheet channel) from that associated with a reduced ability to raise funds using government bond holdings as collateral (liquidity channel). Results show that banks with large government bond portfolios reduced their lending more; evidence indicates that this is a consequence of the balance-sheet channel. The liquidity channel was not activated, partly thanks to the ample availability of Eurosystem funds held by banks. I then control for the channels at work for the banking system as a whole, regardless of government bond holdings (indirect channels), and find that the generalized increase in the cost of funding for banks (cost of funding channel) has a negative impact on bank lending.

Suggested Citation

  • Fabiana Sabatini, 2022. "The impact of sovereign tensions on bank lending: identifying the channels at work," Temi di discussione (Economic working papers) 1397, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1397_22
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2022/2022-1397/en_tema_1397.pdf
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    Cited by:

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    2. Orame, Andrea & Ramcharan, Rodney & Robatto, Roberto, 2023. "Quantitative easing, accounting and prudential frameworks, and bank lending," ESRB Working Paper Series 144, European Systemic Risk Board.

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    More about this item

    Keywords

    credit supply; banks’ sovereign holdings; bank lending channel;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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