Dell'Ariccia, Giovanni Ferreira, Caio Jenkinson, Nigel Laeven, Luc Martin, Alberto Minoiu, Camelia Popov, Alexander
ECB Working Paper No. 2177
This paper identifies the various channels that give rise to a "sovereign-bank nexus" whereby the financial health of banks and sovereigns is intertwined. We find that banks and sovereigns are linked by three interacting channels: banks hold large amounts of sovereign debt; banks are protected by government guarantees; and the health of banks and governments affect and is affected by economic activity. Evidence suggests that all three channels are relevant. The paper concludes with a discussion of the policy implications of these findings.
fiscal policy sovereign risk financial stability financial crisis sovereign-bank nexus