Banking Flows and Credit Risk in Southern European Countries

In this paper, we use data from the first trimester of 2004 through the last trimester of 2014 to assess the impact of an increase in the credit risk of southern European banks—namely, in Portugal, Spain, and Italy—on bank transactions between these countries and German banks. Our analysis adds new evidence for the role of bank credit risk as a driver of foreign bank flows. Our main finding is that the bank’s credit risk has an important role in explaining German bank flows, although this impact is relatively small, namely that an increase in the bank credit risk in southern European countries, increases the German bank flows to these countries. We also find that a bank’s credit risk has become a more significant determinant of German bank flows since the financial crisis.