Sovereign Risk and the Bank Lending Channel: Differences across Countries and the Effects of the Financial Crisis

• Published date: 01 February 2022
• Author: MARÍA CANTERO‐SAIZ,SERGIO SANFILIPPO‐AZOFRA,BEGOÑA TORRE‐OLMO
• Date: 01 February 2022
• DOI: http://doi.org/10.1111/jmcb.12794

DOI: 10.1111/jmcb.12794

MARÍA CANTERO-SAIZ,

SERGIO SANFILIPPO-AZOFRA,

BEGOÑA TORRE-OLMO

Sovereign Risk and the Bank Lending Channel:

Differences across Countries and the Effects of the

Financial Crisis

This article analyses how sovereign risk affectsthe bank lending channel of

monetary policy,and tests whether these effects differed before, during, and

after the onset of the nancial crisis. This issue was analysed only in the

eurozone during the sovereign debt crisis. However, these results are dif-

cult to extrapolate to other countries. First, Europe is the only developed

region that has experienced sovereign risk concerns. Second, it has a cen-

tralised monetary regime controlled by the European Central Bank, so it is

more difcult to adapt monetary decisions to the specic level of sovereign

risk in each country.To overcome these limitations, our analysis is based on

two country scenarios: (1) developed countries (eurozone vs. noneurozone

countries); and (2) developing countries. Wend that the role of sovereign

risk in the transmission of monetary policy is very complex, and its signif-

icance not only varied before, during, and after the global nancial crisis,

but also in developed and developingcountries.

JEL codes: E44, E52, G21

Keywords: sovereign risk, nancial crisis, monetary policy, bank lending

channel

K     banks as loan suppliers is

essential in order to understand how monetary policy affects the economy, as they

are a key element in this process. In recent years, there has been a renewed interest in

This work was supported by University of Cantabria Foundation for Education and Research in the

Financial Sector (UCEIF Foundation) through Santander Financial Institute (SANFI).

MÍ C S is an Associate Professor of Financial Economics, University of Cantabria,

Santander (Cantabria), Spain (E-mail: canterom@unican.es). S S A, BÑ

T O University of Cantabria, Santander (Cantabria), Spain (E-mail: sanlis@unican.es,

torreb@unican.es).

Received April 23, 2019; and accepted in revised form December 23, 2020.

Journal of Money, Credit and Banking, Vol. 54, No. 1 (February 2022)

© 2021 The Ohio State University

286 :MONEY,CREDIT AND BANKING

analysing the bank lending channel as a monetary policy transmission mechanism.1

Supporters of this channel suggest that monetary policy impulses alter loan supply

by affecting the access of banks to loanable funds (Bernanke and Blinder 1988).

Most studies show that banks’ reactions to monetary policy depends on their -

nancial strength. Banks with weaker balance sheets are less able to insulate their

lending from monetary shocks because they have more difculties accessing funding

(Kashyap and Stein 1995, 2000, Kishan and Opiela 2000, 2006, Altunbas, Gamba-

corta, and Marqués-Ibañez 2010).

Another factor that affects the bank lending channel, which received a lot of atten-

tion in Europe during the crisis, is sovereign risk. According to Cantero et al. (2014),

greater sovereign risk pushed up the cost and reduced the availability of funding for

some banks, thereby impacting the bank lending channel. The monetary policy of

the European Central Bank (ECB) was consequently transmitted in a heterogeneous

way across countries, leading to a process of nancial fragmentation. Cantero et al.

found that eurozone banks that operate in higher sovereign risk countries are more

sensitive to monetary contractions. Banks in very high sovereign risk countries also

reduce lending both during monetary restrictions and expansions.

Despite the important repercussions that sovereign risk has on monetary policy

transmission, very little research has been carried out on this issue. Toour knowledge,

only Cantero et al. (2014) focus on this issue in Europe, and no one has analysed it

in other regions. The effects of sovereign risk on monetary policytransmission might

be different in other countries for several reasons.

On the one hand, sovereign risk concerns in developedcountries havebeen focused

exclusively on the eurozone in a very specic time period: the global nancial crisis.

Sovereign risk would therefore probably not affect monetary transmission in other

developed countries. On the other hand, similar to the eurozone, developing coun-

tries have also experienced sovereign debt crises. However, the monetary regime of

the eurozone differs signicantly from other regimes in the world. In the eurozone,

monetary policy has been centralised and controlled by the ECB since 1999, and na-

tional governments control their own scal policy. In the rest of the world, central

banks operate their own monetary policy. The developing economies can therefore

use their own monetary policy to offset the effects of a high sovereign risk.

The relationship between sovereign risk and monetary policy is not clear and,

thus, it would be difcult to extrapolate the results found by Cantero et al. (2014)

to other countries. Due to these limitations, it is necessary to further analyse the

role of sovereign risk in the monetary policy transmission to determine whether

this risk is relevant by itself, or whether its relevance varies across regions or eco-

nomic cycles. In this regard, our article makes a contribution to the literature on

sovereign risk and monetary policy. In particular, we extend the study of Cantero

et al. and analyse how sovereign risk affects the bank lending reaction to monetary

policy in two different country scenarios: (1) developedeconomies, by comparing the

1. See, for example, Apergis and Christou (2015), Borio and Gambacorta (2017), Halvorsen and Ja-

cobsen (2016), Salachas, Laopodis, and Kouretas (2017).