Sovereign risk and the relationship between deposit rates and deposit holdings in the euro area

Abstract

This article employs panel cointegration techniques to explore the impact of the euro crisis on the relationship between deposit rates and deposit holdings in the euro area. For the period prior to the crisis, no significant relationship between these variables can be established. In contrast, since the Lehman collapse, we find a significant negative relationship between bank deposit rates and the amount of deposits. This finding suggests that a reduction in depositor confidence is one of the channels through which sovereign tensions in the euro area have increased financial fragmentation in the euro area and have further reduced the banks' ability to support an economic recovery in countries with weak sovereigns.