IMF Working Papers

The Sovereign-Bank Nexus in Emerging Markets in the Wake of the COVID-19 Pandemic

By Andrea Deghi, Salih Fendoglu, Tara Iyer, Hamid R Tabarraei, Yizhi Xu, Mustafa Yenice

November 11, 2022

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Andrea Deghi, Salih Fendoglu, Tara Iyer, Hamid R Tabarraei, Yizhi Xu, and Mustafa Yenice. The Sovereign-Bank Nexus in Emerging Markets in the Wake of the COVID-19 Pandemic, (USA: International Monetary Fund, 2022) accessed October 6, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

The COVID-19 pandemic has brought the relationship between sovereigns and banks—the so-called sovereign-bank nexus—in emerging market economies to the fore as bank holdings of domestic sovereign debt have surged. This paper examines the empirical relevance of this nexus to assess how it could amplify macro-financial stability risks. The findings show that an increase in sovereign credit risk can adversely affect banks’ balance sheets and credit supply, especially in countries with less-well-capitalized banking systems. Sovereign distress can also impact banks indirectly through the nonfinancial corporate sector by constraining their funding and reducing their capital expenditure. Notably, the effects on banks and corporates are strongly nonlinear in the size of the sovereign distress.

Keywords: Banking sector, Corporate investment, COVID-19, Emerging markets, Financial stability, Sovereign risk, Sovereign-bank nexus

Publication Details

  • Pages:

    54

  • Volume:

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  • DOI:

    ---

  • Issue:

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  • Series:

    Working Paper No. 2022/223

  • Stock No:

    WPIEA2022223

  • ISBN:

    9798400222382

  • ISSN:

    1018-5941