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Bank Lending and the European Sovereign Debt Crisis

Published online by Cambridge University Press:  25 September 2018

Filippo De Marco
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Abstract

I investigate whether bank exposures to sovereign debt during the European debt crisis affected the real economy. I show that a shock to the marked-to-market (MTM) value of bank exposures to sovereign debt led to credit tightening in 2010–2011 that had negative real effects on small and young firms. Because banks do not usually mark their holdings of sovereign bonds to market, I explore the transmission channels of the unrealized losses on credit supply. I show that a shock to MTM exposures reduced short-term bank funding from U.S. money market funds rather than affecting equity or working through alternative channels.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 1 , February 2019 , pp. 155 - 182
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

I thank Hendrik Bessembinder (the editor), Matteo Crosignani (referee), and Robert DeYoung (referee) for their helpful comments. Special thanks go to Susanto Basu, Fabio Schiantarelli, and Philip Strahan for their constant guidance and advice. I am also grateful to Pierluigi Balduzzi, Laura Bonacorsi, Emanuele Brancati, Elena Carletti, Paolo Colla, Ricardo Correa, John Driscoll, Simon Gilchrist (discussant), Xuyang Ma (discussant), Marco Macchiavelli, Florian Nagler, Alexander Popov, Ellis Tallman, Egon Zakrajsek, and other seminar participants at Boston College, the Federal Reserve Board, the 2014 BU–BC Green Line Macro Meeting, the 2014 Western Economic Association International (WEAI) Graduate Student Workshop, the Bank for International Settlements, Bocconi University, the European Bank for Reconstruction and Development, the European Central Bank, the University of Leicester, the Bank of England, the 2015 UniCredit & Universities Macro Banking and Finance Workshop, and the Second Centre for Economic Policy Research (CEPR) Spring Symposium in Financial Economics (Imperial) for helpful comments and suggestions. I also thank the Federal Reserve Board for kindly providing access to Loan Pricing Corporation’s DealScan data at the initial stage of the project. All remaining errors are my own.

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