Bank funding and the recent political development in Italy: What about redenomination risk?

Abstract

The political situation in Italy had and still has implications for sovereign credit and redenomination risk. The current political environment is discussed from an economic and legal perspective focusing strongly on the funding situation of Italian banks. Some empirical evidence is reported. The findings depicted here are compatible with the point of view that the political development in Rome has affected the relationship between bank funding costs in Germany and Italy. In fact, there is clear evidence for the relevance of nonlinearities. Given the time period examined, changes to redenomination risk due to fears about Italy leaving the Euro could be one crucial explanation for the findings reported here.