The sovereign-bank nexus: The role of debt and monetary policy

This policy report analyzes one aspect of the sovereign-bank nexus: the feedback effects between banks and sovereigns derived from the holdings of sovereign debt in domestic banks. We study how this relationship evolved during the European debt crisis and how it responded to the implementation of ECB monetary policy based on Open Market Operations and Marginal Lending Facilities. We find evidence of carry trade behavior by banks and we have some mild evidence that this channel may have been boosted by the liquidity provision policies.