Sovereign Risk and Bank Lending: Evidence from 1999 Turkish Earthquake
We investigate the effect of sovereign risk on credit supply, using August 1999 Earthquake as an exogenous shock leading to an increase in Turkey's default risk. Using data on universe of banks between 1997-2012, we show that, banks with higher ex-ante exposures to government bonds suffered a bigger shock to their networth and decreased lending more ex-post. Tracing the impact of an exogenous increase in the sovereign spread to credit supply, the average bank decreases its credit supply by 1.6 percentage points which corresponds to 55 percent of the actual decline in aggregate loan provision in the aftermath of the shock.
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