The Sovereign-Bank Nexus in EMDEs : What Is It, Is It Rising, and What Are the Policy Implications?
This paper explores the sovereign-bank nexus in emerging markets and developing economies: the interconnectedness between the health of the sovereign and the banking system. Data from 140 emerging markets and developing economies suggest that this...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/531061564493159669/The-Sovereign-Bank-Nexus-in-EMDEs-What-Is-It-Is-It-Rising-and-What-Are-the-Policy-Implications http://hdl.handle.net/10986/32152 |
| Summary: | This paper explores the sovereign-bank
nexus in emerging markets and developing economies: the
interconnectedness between the health of the sovereign and
the banking system. Data from 140 emerging markets and
developing economies suggest that this nexus is rising.
First, banks have increased their exposure to their
sovereigns in the past decade. Second, government debt has
grown, and fiscal positions have deteriorated, raising the
specter of sovereign stress. Third, banking system assets
and bank credit to the private sector have steadily
increased, which may restrict the sovereign's capacity
to contain a banking crisis. Fourth, empirical evidence from
36 emerging markets and developing economies documents the
existence of the nexus and suggests that it has increased
recently. However, deeper country analysis is required for a
better understanding of the sovereign-bank nexus, given
country idiosyncrasies, including the structure of sovereign
debt and the composition of the investor base, and data lags
and opacities. To minimize the adverse effects of the
sovereign-bank nexus, efforts should be focused on
maintaining fiscal and bank buffers, strengthening
surveillance and supervision of the banking system,
improving transparency and data quality of bank-sovereign
linkages, better addressing the regulatory treatment of the
sovereign exposures and government support of the banking
sector, and carefully evaluating the policy trade-offs in
the sovereign-bank nexus. |
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