The Sovereign Crisis : Credit Crunch, Flight-to-Quality and Flight-Home by Loan Types and Geographies

We examine the changes in cross-border bank lending during the European sovereign crisis. We find evidence of: (i) a “flight-to-quality” in “core” European sovereigns and residential mortgages that is specific to large highly levered banks with a small number of defaulted loans in their portfolios; (ii) a “flight-home” in sovereigns that is independent of bank characteristics, including the leverage ratio; and (iii) “risky-lending” to crisis-hit “periphery” countries that is specific to banks with a large number of defaulted exposures and high residential loan-to-value ratios. Along these findings, we provide estimates of changes in cross-border lending by loan types and geographies