Convergence Clubs in Sovereign Bond Yield Spreads and the Impact on Bank Lending

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The key connection in the proposed project is between the existence of convergence in government bond markets and the impact of bank domicile on lending behaviour. The innovation is at least two-dimensional. Firstly, the presence of convergence 'clubs' creates additional risks for the banks in countries with less fiscal discipline. Banks may face a higher cost of funding, with the consequent reduction in their valuation and potential for excessive risk-taking to maintain an adequate level of profitability. Secondly, the empirical model of the evolution of the European sovereign bond market will deliver insights on the need to stimulate bank lending to businesses in the context of the expectation of a sustained era of very low and negative bond yields.