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The Sovereign-Bank Nexus in Emerging Markets in the Wake of the COVID-19 Pandemic

Author

Listed:
  • Andrea Deghi
  • Mr. Salih Fendoglu
  • Tara Iyer
  • Mr. Hamid R Tabarraei
  • Yizhi Xu
  • Mustafa Yenice

Abstract

The COVID-19 pandemic has brought the relationship between sovereigns and banks—the so-called sovereign-bank nexus—in emerging market economies to the fore as bank holdings of domestic sovereign debt have surged. This paper examines the empirical relevance of this nexus to assess how it could amplify macro-financial stability risks. The findings show that an increase in sovereign credit risk can adversely affect banks’ balance sheets and credit supply, especially in countries with less-well-capitalized banking systems. Sovereign distress can also impact banks indirectly through the nonfinancial corporate sector by constraining their funding and reducing their capital expenditure. Notably, the effects on banks and corporates are strongly nonlinear in the size of the sovereign distress.

Suggested Citation

  • Andrea Deghi & Mr. Salih Fendoglu & Tara Iyer & Mr. Hamid R Tabarraei & Yizhi Xu & Mustafa Yenice, 2022. "The Sovereign-Bank Nexus in Emerging Markets in the Wake of the COVID-19 Pandemic," IMF Working Papers 2022/223, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2022/223
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    Cited by:

    1. Claudio Borio & Marc Farag & Fabrizio Zampolli, 2023. "Tackling the fiscal policy-financial stability nexus," BIS Working Papers 1090, Bank for International Settlements.

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