Abstract

We show that after the start of the euro area sovereign debt crisis, lending by non-GIIPS European banks with sizeable holdings of GIIPS sovereign bonds declined relative to nonexposed banks. This effect is not driven by changes in borrower demand or by other shocks to banks' balance sheets. We also find that affected banks withdrew from all foreign markets with the exception of the USA, suggesting an increase in home bias. The slowdown in lending continued after ECB's LTRO in December 2011, but it was lower for banks that increased their risky exposures in the early stages of the crisis.