Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/279456 
Year of Publication: 
2023
Series/Report no.: 
Working Paper No. 2023-1
Publisher: 
Federal Reserve Bank of Atlanta, Atlanta, GA
Abstract: 
We quantify the sovereign-bank doom loop by using the 1999 Marmara earthquake as an exogenous shock leading to an increase in Turkey's default risk. Our theoretical model illustrates that for banks with higher exposure to government securities, a higher sovereign default risk implies lower net worth and tightening financial constraint. Our empirical estimates confirm the model's predictions, showing that the exogenous change in sovereign default risk tightens banks' financial constraints significantly for banks that hold a higher amount of government securities. The resulting tighter bank financial constraints translate into lower credit provision, suggesting that there is a significant balance-sheet channel in transmitting a higher sovereign default risk toward real economic activity.
Subjects: 
banking crisis
bank balance sheets
lending channel
public debt
credit supply
JEL: 
E32
F15
F36
O16
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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