The yield curve and the bank-public debt nexus

The yield curve and the bank-public debt nexus

Fecha: julio 2022

Marta Alberni, Ángel Berges and María Rodríguez

Sovereign yields

SEFO, Spanish and International Economic & Financial Outlook, V. 11 N.º 4 (July 2022)

The upward shift in yield curves since mid-2021 carries major implications for European banks. On the positive side, interest rate tightening foreshadows a period of increasing short-term rates, which will support retail bank net interest income following five years of negative rates and downward pressure on margins. On the negative side, rate hikes portend adverse effects for European banks through two channels: i) higher borrowing and energy costs may impact households’ and businesses’ ability to service their debts with implications for rising non-performing loans; and, ii) the direct and immediate losses on public debt securities held by the banks on their balance sheets. The effect of losses on bank balance sheets related to public debt securities threatens reviving memories of the sovereign-bank risk loop unleashed in the eurozone between 2010 and 2012 via the bank-public debt nexus, but there are noteworthy mitigating factors. In the case of Spain, two factors mitigate the fact that domestic sovereign debt exposures are slightly above the European average in terms of their sensitivity to impairment losses on those portfolios. The first is the average maturity of the public debt portfolios, which is shorter in Spain than in Europe and the second is how those exposures are classified for accounting purposes, which, among other things, translates to lower volatility.

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