Bad Sovereign or Bad Balance Sheets? Euro Area Interbank Fragmentation and Monetary Policy, 2011-15

Does the funding cost differential between peripheral and non-peripheral European banks reflect poor quality of banks' assets (credit risk)? Or the quality of sovereign support in case of failure (sovereign-dependence risk)? Combining bank-to-bank loan data with supervisory information on banks' cross-border exposures, we disentangle the role of sovereign-dependence risk and credit risk in the euro area interbank market fragmentation from 2011 to 2015. Before the announcement of OMTs, high non-performing loan ratios on the GIIPS portfoliohindered banks' access to the interbank market and large sovereign bond holdings raised interbank rates. The OMT and TLTROs reduced both channels of fragmentation