Sovereign Risk and the Bank Lending Channel: Differences across Countries and the Effects of the Financial Crisis

This article analyses how sovereign risk affects the bank lending channel of monetary policy, and tests whether these effects differed before, during, and after the onset of the financial crisis. This issue was analysed only in the eurozone during the sovereign debt crisis. However, these results are difficult to extrapolate to other countries. First, Europe is the only developed region that has experienced sovereign risk concerns. Second, it has a centralised monetary regime controlled by the European Central Bank, so it is more difficult to adapt monetary decisions to the specific level of sovereign risk in each country. To overcome these limitations, our analysis is based on two country scenarios: (1) developed countries (eurozone vs. noneurozone countries); and (2) developing countries. We find that the role of sovereign risk in the transmission of monetary policy is very complex, and its significance not only varied before, during, and after the global financial crisis, but also in developed and developing countries.