Tenure Track Seminar - Mehdi Janbaz

Mehdi Janbaz (University of Udine & University of Trieste) will present his paper “Liquidity Pressure and Sovereign-Bank Diabolic Loop,” co-authored by M. Kabir Hassan (University of New Orleans), Josanco Floreani (University of Udine), and Alberto Dreassi (University of Trieste). 

Medhi Janbaz is interested in a job tenure track in the department (Area: Finance)

Abstract

We study the sovereign-bank nexus through the liquidity channel. Using a sample of 22 European economies during 2012-2021, we find that an increase in banking liquidity pressures leads to a significant widening of SCDS spreads as banks are encouraged to purchase sovereign bonds for liquidity management purposes, consistent with the "flight to liquidity" phenomenon. This excessive exposure increases the probability of sovereign default in the long run by reducing the sovereign debt sustainability and evoking a diabolic loop scenario. The results also suggest that ECB intervention can reinforce the feedback loop by lowering funding costs and triggering collateral trading.