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Sovereign Risk and Bank Lending: Evidence from 1999 Turkish Earthquake

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  • Baskaya, Soner
  • Kalemli-Ozcan, Sebnem

Abstract

We investigate the e ffect of sovereign risk on banks' credit provision. We use the August 1999 Marmara Earthquake as an unanticipated exogenous fiscal shock that led to an increase in Turkish government's default risk. Based on administrative data on the universe of banks, we find that banks with higher exposures to government bonds before the earthquake suffered a bigger shock to their balance sheet and decreased lending more than the banks with lower exposures, after the earthquake. A bank that holds half of its total assets in government bonds decreases lending to private sector, measured as private sector loans to asset ratio, 2.5 percentage points. We show a similar effect on foreign banks' lending outside Turkey, where these banks also had high exposure to Turkish government bonds pre-earthquake, easing concerns on earthquake driven changes in credit demand. Our estimates, which trace the impact of an exogenous 100 basis point increase in sovereign spreads due to earthquake to credit supply by banks, explain 55 percent of the actual decline in loan provision during July-October 1999. These findings show that bank-sovereign doom loop can be responsible for a large fraction of credit crunch during an actual sovereign debt crisis.

Suggested Citation

  • Baskaya, Soner & Kalemli-Ozcan, Sebnem, 2016. "Sovereign Risk and Bank Lending: Evidence from 1999 Turkish Earthquake," CEPR Discussion Papers 11313, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11313
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    References listed on IDEAS

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    1. Farhi, Emmanuel & Tirole, Jean, 2015. "Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops," CEPR Discussion Papers 11024, C.E.P.R. Discussion Papers.
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    4. Alexander Popov & Neeltje Van Horen, 2015. "Exporting Sovereign Stress: Evidence from Syndicated Bank Lending during the Euro Area Sovereign Debt Crisis," Review of Finance, European Finance Association, vol. 19(5), pages 1825-1866.
    5. Viral Acharya & Itamar Drechsler & Philipp Schnabl, 2014. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," Journal of Finance, American Finance Association, vol. 69(6), pages 2689-2739, December.
    6. Buch, Claudia M. & Koetter, Michael & Ohls, Jana, 2016. "Banks and sovereign risk: A granular view," Journal of Financial Stability, Elsevier, vol. 25(C), pages 1-15.
    7. Asim Ijaz Khwaja & Atif Mian, 2008. "Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market," American Economic Review, American Economic Association, vol. 98(4), pages 1413-1442, September.
    8. Filippo Brutti & Philip Ulrich Sauré, 2014. "Repatriation of Debt in the Euro Crisis: Evidence for the Secondary Market Theory," Working Papers 2014-03, Swiss National Bank.
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    Cited by:

    1. Baskaya, Yusuf Soner & di Giovanni, Julian & Kalemli-Özcan, Şebnem & Peydro, José-Luis & Ulu, Mehmet Fatih, 2017. "Capital flows and the international credit channel," Journal of International Economics, Elsevier, vol. 108(S1), pages 15-22.
    2. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2013. "Government default, bonds, and bank lending around the world: What do the data say?," Economics Working Papers 1378, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2015.
    3. Arellano, Cristina & Bai, Yan & Bocola, Luigi, 2017. "Sovereign risk and firm heterogeneity," Staff Report 547, Federal Reserve Bank of Minneapolis.
    4. Tomas Williams, 2017. "Capital Inflows, Sovereign Debt and Bank Lending: Micro-Evidence from an Emerging Market," Working Papers 2017-12, The George Washington University, Institute for International Economic Policy.
    5. Yusuf Soner Baskaya & Julian di Giovanni & Sebnem Kalemli-Özcan & Mehmet Fatih Ulu, 2017. "International spillovers and local credit cycles," Economics Working Papers 1559, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2017.
    6. Cristina Arellano & Yan Bai & Luigi Bocola, 2017. "Sovereign Default Risk and Firm Heterogeneity," NBER Working Papers 23314, National Bureau of Economic Research, Inc.
    7. Gennaioli, Nicola & Martin, Alberto & Rossi, Stefano, 2014. "Banks, Government Bonds, and Default: What do the Data Say?," CEPR Discussion Papers 10044, C.E.P.R. Discussion Papers.
    8. Michael Chui & Emese Kuruc & Philip Turner, 2016. "A new dimension to currency mismatches in the emerging markets - non-financial companies," BIS Working Papers 550, Bank for International Settlements.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F15 - International Economics - - Trade - - - Economic Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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