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1、The Sovereign-Bank Nexus in Emerging Markets in the Wake of the COVID-19 PandemicPrepared by Andrea Deghi, Salih Fendoglu, Tara Iyer, Hamid Reza Tabarraei, Yizhi Xu and Mustafa Y. YeniceWP/22/223IMF Working Papers describe research inprogress by the author(s) and are published toelicit comments and
2、to encourage debate.The views expressed in IMF Working Papers arethose of the author(s) and do not necessarilyrepresent the views of the IMF, its Executive Board,or IMF management.2022NOV 2022 International Monetary FundWP/22/223IMF Working PaperMonetary and Capital Markets DepartmentThe Sovereign-B
3、ank Nexus in Emerging Marketsin the Wake of the COVID-19 PandemicPrepared by Andrea Deghi, Salih Fendoglu, Tara Iyer,Hamid Reza Tabarraei, Yizhi Xu, and Mustafa Yasin Yenice*Authorized for distribution by Mahvash QureshiNovember 2022IMF Working Papers describe research in progress by the author(s) a
4、nd 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, o r IMF management.ABSTRACT: The COVID-19 pandemic has brought the relationship between sovere
5、igns and banks the so-called sovereign-bank nexusin 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 incre
6、ase in sovereign credit risk can adversely affect banks balance sheets and credit supply, especially in cou ntries with less-well-capitalized banking systems. Sovereign distress can also impact banks indirectly through the nonfinancial corporate sector by constraining their funding and reducing thei
7、r capital expenditure. Notably, the effects on banks and corpora tes are strongly nonlinear in the size of the sovereign distress.JEL Classification Numbers:E44, F34, F65, G21Sovereign-bank nexus; emerging markets; financial stability;Keywords:;sovereign risk COVID-19 banking sector corporate invest
8、mentADeghiimf.org; SFendogluimf.org; HTabarraeiimf.org;Authors E-Mail Address:TIyerimf.org; YXuimf.org; MYeniceimf.org* The authors are very grateful for comments by Viral Acharya, Tobias Adrian, Fabio Natalucci, Mahvash Qureshi, JrmeVandenbussche and seminar participants at the International Moneta
9、ry Fund, the Association of Supervisors of Banks of the Americas (ASBA), Central Bank of Colombia, Yale Financial Stability Program, The Hong Kong Monetary Authority, The Monetary Authority of Singapore, and The Joint Vienna Institute. Oksana Khadarina and Dmitry Yakovlev provided outstanding resear
10、ch assistance.WORKING PAPERSThe Sovereign-Bank Nexus in Emerging Markets in the Wake of the COVID-19 PandemicPrepared by Andrea Deghi, Salih Fendoglu, Tara Iyer, Hamid Reza Tabarraei, Yizhi Xu, and Mustafa Yasin YeniceIMF WORKING PAPERSThe Sovereign-Bank Nexus in Emerging Markets in the Wake of the
11、COVID-19 PandemicContentsI. INTRODUCTION _ 4 II. CONCEPTUAL FRAMEWORK _ 5III. DEVELOPMENTS IN THE SOVEREIGN-BANK NEXUS IN EMERGING MARKETS: SOME STYLIZED FACTS _ 8IV. EVALUATING THE STRENGTH OF THE NEXUS _ 10V. AN EMPIRICAL EVALUATION OF THE TRANSMISSION MECHANISMS _ 12A. Sovereign Exposure Channel
12、_ 12B. Safety Net Channel _ 167C. Macroeconomic Channel _ 21VI. CONCLUSIONS _ 266REFERENCES _ 267FIGURESFigure 1 Key Channels of the Sovereign-Bank Adverse Feedback Loop _ 6Figure 2. Developments in Emerging Market Public Debt and Banks Sovereign Exposures _ 9Figure 3. Transmission of Risks through
13、the Sovereign-Bank Nexus: Strength of the Main Channels across Emerging Markets_ 11Figure 4. Transmission of Sovereign Risk through the Exposure Channel _ 155Figure 5. Stylized Facts on Bank Support Rating Floor in Emerging Markets _ 17Figure 6. The Effect of Safety Nets on Banks Returns following S
14、overeign Distress in EMs _ 19Figure 7. Additional Robustness Analysis on the Effect of Safety Net on Banks Returns _ 20Figure 8. Banks Risk-Taking and Moral Hazard during Sovereign Distress _ 211Figure 9. Sovereign Downgrades and Bound vs. Unbound Firms in Emerging Markets _ 23Figure 10. Sovereign D
15、owngrades Impact on Bound vs. Unbound Firms in EMs _ 24Figure A.II.1 The Impact of a Tightening of Global Financial Conditions on Sovereign and Bank _ 49Figure A.III.1 Moral Suasion and Risk Shifting: Threshold Effects _ 512TABLESTable 1. Exposure Channel: The Effect of Sovereign Distress on Bank Eq
16、uity at Different Distress Thresholds 290Table 2. Exposure Channel: Valuation Effect on Fiscal Debt and Key Bank Outcome Variables _ 31Table 3. Exposure Channel: The effect of debt rollover risks on key bank outcome variables _ 312Table 4. Safety Net Channel: The Effect on Banks Equity Abnormal Retu
17、rns _ 323Table 5: Safety Net Channel: The Effect on Banks Risk-Taking Activity_ 345Table 6. Macroeconomic Channel: Baseline Regressions. Change in investment ratio and debt _ 356INTERNATIONAL MONETARY FUND2IMF WORKING PAPERSThe Sovereign-Bank Nexus in Emerging Markets in the Wake of the COVID-19 Pan
18、demicTable 7. Macroeconomic Channel: Corporate Investment Following a Sovereign Downgrade at _ 367Table 8. Macroeconomic Channel: Placebo Tests Baseline Regressions _ 38Table 9: Macroeconomic Channel: Indirect Impact of Sovereign Downgrade on Banks through Firms_ 3938Table A.I.1 List of Countries in
19、 the Emerging Markets Sample _ 401Table A.I.2. Sovereign Stress/Default Episodes Coverage _ 412Table A.I.3. Data Description and Sources _ 423Table A.I.4 Summary Statistics _ 445Table A.II.1. Number of daily changes in volatility regimes _ 47Table A.III.1. Regression Results for the Drivers of Banks
20、 Sovereign Debt Holdings _ 501ANNEXESAnnex I. Data Description and Summary Statistics _ 390Annex II. Structural Model Estimation and Model Extensions _ 456Annex III. Examining the Presence of Moral Suasion and Risk-Shifting _ 489INTERNATIONAL MONETARY FUND3IMF WORKING PAPERSThe Sovereign-Bank Nexus
21、in Emerging Markets in the Wake of the COVID-19 PandemicI. IntroductionPublic debt in emerging market economies has surged in the wake of the COVID-19 pandemic as economic activity has declined and governments have increased fiscal support to nonfinancial firms and households to cushion the impact o
22、f the crisis. Most of the additional government financing needs have been met by domestic banksand their exposure to domestic sovereign debt has reached historic highswhich has reinforced the two-way relationship between the financial health of the sovereign and banking sectors. In this paper, we ex
23、amine the empirical strength of this relationship and the channels through which the sovereign and banking sectors interact.The interconnectedness of banks and sovereigns is often referred to as the sovereign -bank “nexus”, whereby shocks originating in one of the two sectors may cause a negative “f
24、eedback loop” and amplify the effect of the shock. Earlier literature has identified three main channels through which shocks from one sector may transmit to the other: the exposure of banks to the sovereign debt through their government debt holdings (the “exposure” channel); the implicit and expli
25、cit guarantees of the sovereign to banks (the “safety net” channel); and the indirect connection between the two sectors through non -financial firms (the “macroeconomic” channel). In the face of an adverse sectoral shock, these channels tend to interact and amplify vulnerabilities, generating an ad
26、verse feedback loop (Farhi and Tirole 2018; DellAriccia et al. 2018).While the linkages between sovereign and banking sector risk have been well explored for advanced economies in previous studies (for example, Acharya et al. 2018; Gennaioli, Martin and Rossi, 2018), their findings may not be direct
27、ly generalizable to emerging markets, which tend to have different structural characteristicssuch as a lower level of financial sector development, a larger share of foreign -currency-denominated public debt and higher refinancing risks. These factors could render them more sensitive to external sho
28、cks and strengthen the interconnectedness between the sovereign and banking sectors.Furthermore, the relationship between sovereigns and banks has also become more complex during the pandemic, as interdependencies with the real sector have deepened. Governments have generally supported firms through
29、 unprecedented policy measures. In turn, the corporate sector has become highly dependent on the continuation of policy support in cases where the economic recovery has yet to firmly take hold and corporate vulnerabilities are high, thereby increasing potential spillovers across corporates, banks an
30、d sovereign.Against this background, this paper uses country-level, bank-level, and firm -level data to provide both an overall analysis of the cross-sectoral propagation of sovereign, bank and corporate default risk, and specific analyses of three main channels through which sovereigns and banks ca
31、n affect each others financial health. Our overall sample comprises 54 countries and covers the period 1990 -2021.The overall shock propagation analysis relies on estimating simultaneous equations at the country level. We exploit the heteroskedasticity in the data to identify structural shocks to th
32、e endogenous variables, following Rigobon (2003). This identification strategy exploits the fact that changes in the vola tility of the structural shocks contain additional information on the relationship between endogenous variables.1 We find that there are significant feedback effects within the n
33、exus in emerging markets and that the strength of the links varies1 For example, in a period of large bank risk shocks, we learn more about the response of sovereign risk to bank risk as the covariance between both risks increases. During these periods, bank risk shocks are more likely to occur and
34、can be used as a“probabilistic instrument” to trace the response of sovereign risk.INTERNATIONAL MONETARY FUND4IMF WORKING PAPERSThe Sovereign-Bank Nexus in Emerging Markets in the Wake of the COVID-19 Pandemicbetween different sectors. Notably, spillovers from sovereign default risk to banks are, o
35、n average, larger than those in the opposite direction from banks to sovereign default risk.To analyze the exposure channel, we identify the effect of sovereign distress on ba nks performance by exploiting fiscal shocks and cross-sectional variation in banks holdings of government debt. Fiscal shock
36、s are defined as periods in which the credit default swap spread is above a certain threshold, or a sovereign is in outright default. We find that, in the event of sovereign distress, banks with a 10 -percentage-point higher ratio of government debt holdings to total bank assets face an expected def
37、ault frequency (EDF), that is, 0. 4 percentage points higher than the average bank. The difference is economically significant considering that it corresponds to about one-third of median banks EDF. Notably, we also find this effect is almost twice as large for banks with relatively less capital and
38、 increases with the level of sovereign distress, thereby curtailing banks capital and lending significantly in severe sovereign distress episodes. These results are robust to a range of sensitivity checks, including alternative identification strategies to construct fiscal shocks.To examine the rele
39、vance of the safety net channel, we focus on the impact of implicit government guarantees (proxied by the Fitch government support rating) on bank equity returns. We find that such guarantees mitigate banking sector tail risks in the first few months following a fiscal shock by improving banks marke
40、t returns.However, this effect turns negative after six months, suggesting that the perception of a weaker ability to support banks following sovereign distress could undermine investor confidence. Notably, banks with higher implicit guarantees and lower capital expand their loan portfolios relative
41、ly more aggressively after sovereign distress, leading to a cumulative credit growth of about 8 percentage points higher than other banks and to a larger increase in nonperforming loans. These results suggest that higher government guarantees could increase banks risk-taking behavior after sovereign distress.Finally, in our analysis of the macroeconomic channel, we show that sovereign distress may also pose risks to non-financial firms, with adverse effects on bank asset quality. Followi