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Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015

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  • Silvia Gabrieli
  • Claire Labonne

Abstract

We measure the relative role of sovereign-dependence risk and balance sheet (credit) risk in euro area interbank market fragmentation from 2011 to 2015. We combine bank-to-bank loan data with detailed supervisory information on banks? cross-border and cross-sector exposures. We study the impact of the credit risk on banks? balance sheets on their access to, and the price paid for, interbank liquidity, controlling for sovereign-dependence risk and lenders? liquidity shocks. We find that (i) high non-performing loan ratios on the GIIPS portfolio hinder banks? access to the interbank market throughout the sample period; (ii) large sovereign bond holdings are priced in interbank rates from mid-2011 until the announcement of the OMT; (iii) the OMT was successful in closing this channel of cross-border shock transmission; it reduced sovereign-dependence and balance sheet fragmentation alike.

Suggested Citation

  • Silvia Gabrieli & Claire Labonne, 2018. "Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015," Supervisory Research and Analysis Working Papers RPA 18-3, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbqu:rpa18-3
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    Cited by:

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    2. Müller, Alexander & Paulick, Jan, 2020. ""The devil is in the details, but so is salvation": Different approachesin money market measurement," Discussion Papers 66/2020, Deutsche Bundesbank.
    3. Xuan Wang, 2021. "Bankruptcy Codes and Risk Sharing of Currency Unions," Tinbergen Institute Discussion Papers 21-009/IV, Tinbergen Institute.
    4. Christophe Blot & Paul Hubert, 2018. "Monetary policy with transitory vs. permanently low growth," Sciences Po publications info:hdl:2441/6gjj4t61tm9, Sciences Po.

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    More about this item

    Keywords

    interbank market; credit risk; fragmentation; sovereign risk; country risk; credit rationing; market discipline;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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