Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/245523 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 9342
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We explore how changes in capital-based macroprudential regulation in the euro area affect the exposure of national banking sectors to domestic government debt, thus strengthening or weakening the sovereign-bank nexus. To do so, we construct a measure of macroprudential policy based on the Macroprudential Policy Evaluation Database (MaPPED) and estimate responses to the unsystematic component of macroprudential policy in panel vector autoregressive models for euro area "core" and "periphery" countries. Our main finding suggests that an unsystematic capital-based macroprudential policy tightening increases banks' exposure to domestic sovereign bonds in the periphery countries and thus deepens the sovereign-bank nexus. By contrast, banks in the core countries expand their loan portfolios, rather than adjusting their domestic sovereign bond holdings, in response to the shock. We show that this result can be tied to the theoretical literature and investigate several transmission channels. Our results are highly robust to changes in the econometric set-up and the macroprudential indicator used.
Subjects: 
macroprudential policy
euro area
sovereign-bank nexus
panel vector autoregressive model
JEL: 
C33
G21
G28
H63
Document Type: 
Working Paper
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