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Sovereign Risk and Bank Lending: Evidence from 1999 Turkish Earthquake

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  • Kalemli-Özcan, Sebnem
  • Baskaya, Soner
Abstract
We investigate the e ffect of sovereign risk on banks' credit provision. We use the August 1999 Marmara Earthquake as an unanticipated exogenous fiscal shock that led to an increase in Turkish government's default risk. Based on administrative data on the universe of banks, we find that banks with higher exposures to government bonds before the earthquake suffered a bigger shock to their balance sheet and decreased lending more than the banks with lower exposures, after the earthquake. A bank that holds half of its total assets in government bonds decreases lending to private sector, measured as private sector loans to asset ratio, 2.5 percentage points. We show a similar effect on foreign banks' lending outside Turkey, where these banks also had high exposure to Turkish government bonds pre-earthquake, easing concerns on earthquake driven changes in credit demand. Our estimates, which trace the impact of an exogenous 100 basis point increase in sovereign spreads due to earthquake to credit supply by banks, explain 55 percent of the actual decline in loan provision during July-October 1999. These findings show that bank-sovereign doom loop can be responsible for a large fraction of credit crunch during an actual sovereign debt crisis.

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  • Kalemli-Özcan, Sebnem & Baskaya, Soner, 2016. "Sovereign Risk and Bank Lending: Evidence from 1999 Turkish Earthquake," CEPR Discussion Papers 11313, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11313
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    Cited by:

    1. Tomas Williams, 2018. "Capital Inflows, Sovereign Debt and Bank Lending: Micro-Evidence from an Emerging Market," The Review of Financial Studies, Society for Financial Studies, vol. 31(12), pages 4958-4994.
    2. Federico, Stefano & Hassan, Fadi & Rappoport-Redondo, Veronica, 2019. "Trade shocks and credit reallocation," LSE Research Online Documents on Economics 103422, London School of Economics and Political Science, LSE Library.
    3. Baskaya, Yusuf Soner & di Giovanni, Julian & Kalemli-Özcan, Şebnem & Peydro, José-Luis & Ulu, Mehmet Fatih, 2017. "Capital flows and the international credit channel," Journal of International Economics, Elsevier, vol. 108(S1), pages 15-22.
    4. Gennaioli, Nicola & Martin, Alberto & Rossi, Stefano, 2018. "Banks, government Bonds, and Default: What do the data Say?," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 98-113.
    5. Fernando Broner & Alberto Martin & Lorenzo Pandolfi & Tomas Williams, 2019. "Winners and losers from Sovereign debt inflows: evidence from the stock market," Economics Working Papers 1693, Department of Economics and Business, Universitat Pompeu Fabra.
    6. Cristina Arellano & Yan Bai & Luigi Bocola, 2017. "Sovereign risk and firm heterogeneity," Staff Report 547, Federal Reserve Bank of Minneapolis.
    7. Dell'Ariccia, Giovanni & Ferreira, Caio & Jenkinson, Nigel & Laeven, Luc & Martin, Alberto & Minoiu, Camelia & Popov, Alexander, 2018. "Managing the sovereign-bank nexus," Working Paper Series 2177, European Central Bank.
    8. Julian di Giovanni & Şebnem Kalemli-Özcan & Mehmet Fatih Ulu & Yusuf Soner Baskaya, 2022. "International Spillovers and Local Credit Cycles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(2), pages 733-773.
    9. Bottero, Margherita & Lenzu, Simone & Mezzanotti, Filippo, 2020. "Sovereign debt exposure and the bank lending channel: Impact on credit supply and the real economy," Journal of International Economics, Elsevier, vol. 126(C).
    10. José Carlos Teixeira & Carlos Vieira & Paulo Ferreira, 2021. "The Effects of Government Bonds on Liquidity Risk and Bank Profitability in Cape Verde," IJFS, MDPI, vol. 9(1), pages 1-23, January.
    11. Lucas A. Mariani & Silvia Marchesi, 2023. "International Lending Channel, Bank Heterogeneity and Capital Inflows (Mis)Allocation," Working Papers 887, Economic Research Southern Africa.
    12. Cristina Arellano & Yan Bai & Luigi Bocola, 2017. "Sovereign Default Risk and Firm Heterogeneity," NBER Working Papers 23314, National Bureau of Economic Research, Inc.
    13. Gonzalez-Aguado, Eugenia, 2022. "Interest Rate Shocks and the Composition of Sovereign Debt," TSE Working Papers 22-1379, Toulouse School of Economics (TSE).
    14. Michael Chui & Emese Kuruc & Philip Turner, 2016. "A new dimension to currency mismatches in the emerging markets - non-financial companies," BIS Working Papers 550, Bank for International Settlements.

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F15 - International Economics - - Trade - - - Economic Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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