Does Quantitative Easing mitigate the Sovereign-Bank Nexus?
Series
School of Finance Workingpaper
Type
working paper
Date Issued
2020-12-14
Author(s)
Abstract
The credit risk of the sovereign affects the financial health of its banking sector and vice versa, creating an adverse feedback loop known as "sovereign-bank nexus". We show that Quantitative Easing can effectively mitigate the sovereign-bank nexus. Our results indicate that the ECB's Public Sector Purchase Programme reduced the co-movement of sovereign and bank credit risk by almost 80%. The mitigation is driven by the euro area periphery and works through three channels: (i) a reduction in government bond holdings of banks, (ii) an increase of government bond prices, and (iii) an increase inexcess liquidity holdings of banks.
Language
English
HSG Classification
contribution to scientific community
HSG Profile Area
SOF - System-wide Risk in the Financial System
Publisher
SoF HSG
Volume
2021
Number
01
Pages
35
Subject(s)
Eprints ID
261065
File(s)![Thumbnail Image]()
open.access
Name
21_01_Bechtel Eisenschmidt Ranaldo_Does_Quantitative_Easing_mitigate_the_Sovereign-Bank_Nexus.pdf
Size
474.69 KB
Format
Adobe PDF
Checksum (MD5)
cfe0ad2150fd4ef4a46b31b1f40867b0