Fed in Print

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.

Silvia Gabrieli & Claire Labonne, Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015, Federal Reserve Bank of Boston, Supervisory Research and Analysis Working Papers RPA 18-3, 12 Jul 2018.

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

Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal