Transmission of Sovereign Risk to Bank Lending

Bașkaya, Y. S. , Hardy, B., Kalemli-Özcan, Ș. and Yue, V. Z. (2023) Transmission of Sovereign Risk to Bank Lending. Working Paper. Federal Reserve Bank of Atlanta. (doi: 10.29338/ph2023-2).

Abstract

Summary: Banks hold a significant exposure to their own sovereigns. An increase in sovereign risk may hurt banks' balance sheets, causing a decrease in lending and a decline in economic activity. We quantify the transmission of sovereign risk to bank lending and provide new evidence about the effect of sovereign risk on economic outcomes. We consider the 1999 Marmara earthquake in Turkey as an exogenous shock leading to an increase in Turkey's default risk. Our empirical estimates show that, for banks holding a higher amount of government securities, the exogenous change in sovereign default risk tightens banks' financial constraints significantly. The banks' resulting tighter 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.

• Item Type: Research Reports or Papers (Working Paper)
• Additional Information: Federal Reserve Bank Atlanta working paper, no. 2023-2. Policy Hub.
• Status: Published
• Glasgow Author(s) Enlighten ID: Baskaya, Dr Soner
• Authors: Bașkaya, Y. S., Hardy, B., Kalemli-Özcan, Ș., and Yue, V. Z.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Publisher: Federal Reserve Bank of Atlanta