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Home Bias in Bank Sovereign Bond Purchases and the Bank-Sovereign Nexus

Author

Listed:
  • Desislava C. Andreeva

    (European Central Bank)

  • Thomas Vlassopoulos

    (European Central Bank)

Abstract

We study whether a pre-existing link between bank and sovereign credit risk biased euro-area banks' sovereign debt portfolio choices at the turn of 2011-12, a period of exceptional increases in their domestic sovereign bond holdings. When bank and sovereign creditworthiness are correlated and sovereign credit risk is elevated, incentives to "shift risk" may render domestic sovereign bonds more attractive than other liquid assets. By investing in domestic government bonds, banks can earn the full risk premium while the risk itself is largely borne by their creditors, as it materializes in states of the world where the banks are likely to be insolvent anyway. Using a bank-level data set, we find evidence that this mechanism can explain a significant part of the purchases of domestic sovereign bonds in the final quarter of 2011 and the first quarter of 2012.

Suggested Citation

  • Desislava C. Andreeva & Thomas Vlassopoulos, 2019. "Home Bias in Bank Sovereign Bond Purchases and the Bank-Sovereign Nexus," International Journal of Central Banking, International Journal of Central Banking, vol. 15(1), pages 157-197, March.
    • Handle: RePEc:ijc:ijcjou:y:2019:q:1:a:4
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    Citations

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    Cited by:

    1. Gomes, João F. & Grotteria, Marco & Wachter, Jessica A., 2023. "Foreseen risks," Journal of Economic Theory, Elsevier, vol. 212(C).
    2. Rojas, Luis E. & Thaler, Dominik, 2023. "The bright side of the doom loop: banks’ sovereign exposure and default incentives," Working Paper Series 2869, European Central Bank.
    3. Albertazzi, Ugo & Barbiero, Francesca & Marqués-Ibáñez, David & Popov, Alexander & Rodriguez d’Acri, Costanza & Vlassopoulos, Thomas, 2020. "Monetary policy and bank stability: the analytical toolbox reviewed," Working Paper Series 2377, European Central Bank.
    4. Meyland, Dominik & Schäfer, Dorothea, 2021. "Home Bias in Sovereign Exposure and the Probability of Bank Default – Evidence From EU-Stress Test Data," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242453, Verein für Socialpolitik / German Economic Association.
    5. Daniel Monteiro, 2023. "Macrofinancial Dynamics in a Monetary Union," European Economy - Discussion Papers 188, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    6. Jean Dermine, 2020. "Banks' home bias in government bond holdings: Will banks in low‐rated countries invest in European safe bonds (ESBies)?," European Financial Management, European Financial Management Association, vol. 26(4), pages 841-858, September.
    7. Affinito, Massimiliano & Albareto, Giorgio & Santioni, Raffaele, 2022. "Purchases of sovereign debt securities by banks during the crisis: The role of balance sheet conditions," Journal of Banking & Finance, Elsevier, vol. 138(C).
    8. Aneta Hryckiewicz & Petra Pawlowski & Piotr Michal Mazur & Marcin Borsukb, 2022. "Sovereign Debt Holding and Bank Sensitivity toward Market Risk: An Alternative View of the Bank–Sovereign Problem," International Journal of Central Banking, International Journal of Central Banking, vol. 18(5), pages 1-52, December.
    9. Cifarelli, Giulio & Paladino, Giovanna, 2020. "A non-linear analysis of the sovereign bank nexus in the EU," The Journal of Economic Asymmetries, Elsevier, vol. 21(C).
    10. Bales, Stephan, 2022. "Sovereign and bank dependence in the eurozone: A multi-scale approach using wavelet-network analysis," International Review of Financial Analysis, Elsevier, vol. 83(C).

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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