IGTA Journal - Winter 2020/2021

29/01/2021 The sovereign-bank-corporate nexus – virtuous or vicious? https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210128~8f5dc86601.en.html 6/13 Bank lending to euro area non-financial corporations and bank credit standards Annual percentage changes; weighted index Sources: ECB (BSI statistics, Bank Lending Survey) and ECB calculations. The sovereign-bank-corporate nexus – this time is different But the nature of these interdependencies differs fundamentally from previous crises. Most notably, this time, the crisis did not originate in the financial sector, as in the global financial crisis [6] , but in the real economy, and public support was granted to firms, not banks. Moreover, the pandemic has not raised concerns of moral hazard. While the global financial crisis resulted in the mutualisation of risks that should have been borne by the ultimate risk-takers, government support during the pandemic has protected the economy in the face of an exogenous shock that was not caused by excessive risk-taking. In the pandemic crisis, broad-based fiscal support has been both necessary and proportionate to mitigate the economic and social costs of the containment measures for large parts of society. At the same time, with the Banking Union still incomplete, the pandemic has once again exposed old vulnerabilities. For example, by absorbing some of the newly issued sovereign debt, banks have increased their exposures to the general government in many euro area countries, reinforcing the links between sovereigns and banks ( Chart 6 ). [7 ] IGTA eJournal | Winter 2020/21 | 11