Job Market Paper

Sovereign Risk and the Maturity of Bank Credit

Draft in progress

Single-authored

Abstract

This paper studies how banks adjust the maturity of credit when sovereign stress rises. I use confidential administrative data from the Banco de Portugal that track monthly bank–firm credit relationships and the maturity of outstanding credit during the 2010–2012 European sovereign debt crisis. I exploit differences in banks’ pre-crisis exposure to distressed sovereign debt to compare lending to the same firm by banks with different exposure. I find that banks do not reduce lending proportionately across maturities. Banks more exposed to sovereign risk cut long-term credit while maintaining short-term lending to the same firms, shifting the maturity of credit within continuing relationships. The contraction in long-term credit is larger for small, highly leveraged, and financially constrained firms. At the firm level, total bank credit also falls: firms partially replace the long-term credit they lose with short-term borrowing, but less-exposed lenders do not expand lending and firms are less likely to form new relationships. Sovereign stress therefore affects both the quantity and maturity of bank financing, leaving firms with less credit and shorter financing horizons.

Working Papers

Senior Debt and Market Access

with Agustín Velasquez and Mahamoud Islam (IMF)

Abstract

Multilateral lending is a significant component of sovereign debt in emerging and developing economies. Because multilateral creditors receive de facto preferred creditor treatment, a larger stock of multilateral claims can affect the pricing of private sovereign debt through two opposing channels. On the one hand, official lending can ease financing constraints and rollover pressure, reducing the likelihood of distress. On the other hand, the seniority of multilateral claims leaves private creditors with a smaller residual claim in states of distress, potentially increasing their required compensation. We study how these forces interact using an annual panel of 55 emerging and developing economies over 2004–2024. We measure senior creditor exposure as the share of external public and publicly guaranteed debt owed to multilateral creditors and relate it to sovereign spreads from the JP Morgan EMBI Global. Using a quadratic specification with country and year fixed effects, we find that (i) on average, the relationship between senior creditor exposure and sovereign spreads is non-linear, with the marginal association becoming positive at about 40 percent of external debt; (ii) the non-linearity is state dependent and concentrated among more vulnerable sovereigns; and (iii) it is specific to multilateral creditor exposure, consistent with the role of de facto seniority. The results are robust to alternative specifications, additional controls, global risk factors, and excluding IMF credit from the exposure measure. We interpret the evidence as consistent with a trade-off between the catalytic benefits of official finance and the dilution of private claims created by senior creditor exposure.

Work in Progress

Sanctions, Lending, and the Bank Ownership Channel

with Matteo Ficarra

Abstract

This paper examines the impact of sanctions on bank lending with a focus on the role of bank ownership. Using balance sheet and ownership data for over 1,800 banks in 56 emerging market economies and 259 sanction episodes between 1995 and 2020, we find that in response to sanctions foreign banks significantly reduce credit supply, particularly to firms, in line with a flight-to-safety type of behaviour. As private domestic banks are unable to increase lending, state-owned banks partially absorb credit demand by expanding loans to both firms and households, suggesting a countercyclical response. This asymmetric response is consistent across different sanction types, but particularly strong for trade and financial sanctions. Our findings unveil a new channel to assess the effectiveness of sanctions, highlighting the importance of banks’ ownership structure, and offers novel insights on the response of cross-border credit flows to sanctions.