Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/234094 
Year of Publication: 
2021
Series/Report no.: 
ECB Working Paper No. 2540
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper explores whether foreign intermediaries stabilise or destabilise lending to the real economy in the presence of sovereign stress in the domestic economy and abroad. Tensions in the government debt market may lead to serious disruptions in the provision of lending (i.e., the so-called "doom loop"). In this context, the presence of foreign banks poses a fundamental, yet unexplored, trade-off. On the one hand, domestic sovereign shocks are broadly inconsequential for the lending capacity of foreign banks, given that their funding conditions are not hampered by such shocks. On the other, these intermediaries may react more harshly than domestic banks to a deterioration in local loan risk and demand conditions. We exploit granular and confidential data on euro area banks operating in different countries to assess this trade-off. Overall, the presence of foreign lenders is found to stabilise lending, thus mitigating the doom loop.
Subjects: 
Sovereign stress
International banks
Lending activity
JEL: 
E5
G21
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-4540-0
Document Type: 
Working Paper

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