When banks invest heavily in sovereign debt, and in domestic sovereign debt in particular, the result is a debt home bias. This column presents evidence of a partially voluntary and partially involuntary sovereign debt home bias among large European banks. This bias is stronger if the sovereign is risky and shareholder rights are strong or the government has a positive ownership in the bank. Also, banks with a strong home bias are valued positively by the stock market.
Bálint Horváth, Harry Huizinga, Vasso P. Ioannidou, Friday, July 31, 2015 - 00:00
Tamon Asonuma, Said Bakhache, Heiko Hesse, Saturday, July 4, 2015 - 00:00
Home bias in banks’ holdings of domestic government debt could pose problems for financial stability and crisis management. This column discusses some of the determinants of this bias. Factors that increase macroeconomic instability are associated with higher home bias, while better investment opportunities in the private sector and better institutional quality reduce home bias.
Tamon Asonuma, Said Bakhache, Heiko Hesse, Sunday, April 5, 2015 - 00:00
Dennis Reinhardt, Cameron McLoughlin, Ludovic Gauvin, Wednesday, November 5, 2014 - 00:00
Paolo Angelini, Giuseppe Grande, Tuesday, April 8, 2014 - 00:00
The ‘deadly embrace’ between banks and their government has strengthened with the EZ Crisis. This column argues that this has mostly been consequence rather than a cause of the Crisis. Moreover, adverse bank-sovereign negative feedback depends on the economy-wide effects of the sovereign risk, not just the banks’ direct exposure. Loosening the embrace requires sound public finances and well-capitalized, well-supervised banks – including the banking union project.
Maurizio Michael Habib, Livio Stracca, Friday, February 28, 2014 - 00:00
At the peak of the Global Crisis, the US dollar appreciated and US Treasury yields fell, suggesting that foreign investors were purchasing US assets in general. Actually, they were fleeing only into short-term Treasury bills. This column discusses recent research showing that there are indeed no securities which are consistently a safe haven across different crisis episodes – not even US assets. However, a peculiarity of the US securities is that foreign investors do not necessarily ‘run for the exit’, even when a crisis has its epicentre in the US.
Viral Acharya, Sascha Steffen, Sunday, April 21, 2013 - 00:00
This paper argues that the European banking crisis can in part be explained by a “carry trade” behavior of banks. The results are supportive of moral hazard in the form of risk-taking by under-capitalized banks to exploit low risk weights and central-bank funding of risky government bond positions.