Italian Sovereign Spreads: Their Determinants and Pass-through to Bank Funding Costs and Lending Conditions

IMF Working Papers, April 3, 2013

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Volatility in Italian sovereign spreads has increased since mid-2011.
News on the euro area debt crisis and country specific events were important drivers of sovereign spreads.
Movements in sovereign spreads affect CDS spreads and bond yields of Italian banks, and are transmitted rapidly to firm lending rates.
Credit supply constraints due to bank funding shortages from the sovereign debt crisis were a major factor behind the lending slowdown in late 2011.
In 2012 weak demand appears to have been driving changes in credit more than supply.

Sovereign spread movements:
- Affect CDS spreads of Italian banks.
- Affect bond yields of Italian banks.
- Are transmitted rapidly to firm lending rates.
Lending slowdown drivers:
- Late 2011: credit supply constraints linked to bank funding shortages from the sovereign debt crisis.
- 2012: weak demand was a more important driver of changes in credit than supply.

Banks with lower capital ratios were found to be more sensitive to swings in sovereign spreads.
Banks with higher nonperforming loans were found to be more sensitive to swings in sovereign spreads.

Subjects: Banking, Bond yields, Credit, Credit default swap, Financial institutions, Financial services, Money, Sovereign bonds, Yield curve
Keywords include: access to funding, bank, bank capital, bank funding costs, bank risk, banks CD, banks' CD, BNP Paribas, Bond yields, CDS, CDS premium, CDS spread, Commerzbank, comparison group, Credit, Credit default swap, funding cost, Global, government bond bond yield, Italian sovereign spreads, lending, lending conditions, loan supply and demand, Sovereign bonds, WP, Yield curve

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