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 Ioannidou, 31 July 2015
Tamon Asonuma, Said Bakhache, Heiko Hesse, 04 July 2015
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, 05 April 2015
The interest in the implications of sovereign debt home bias on debt sustainability has been growing. This column presents new evidence on this issue using a sample of advanced and emerging markets. Home bias generally reduces the cost of borrowing for both advanced and emerging markets when debt levels are moderate to high. A worsening of market sentiments diminishes the favourable impact of home bias on the cost of borrowing, particularly for emerging markets. In addition, higher home bias is associated with higher debt levels, and with less responsive fiscal policy.
Dennis Reinhardt, Cameron McLoughlin, Ludovic Gauvin, 05 November 2014
In the aftermath of the Global Crisis, policymakers and academics alike discussed how uncertainty surrounding macroeconomic policymaking has impacted domestic investment. At the same time, concerns regarding the spillover impact of monetary policy in advanced economies on emerging market economies featured strongly in the international policy debate. This column draws the two debates together, and examines how policy uncertainty in advanced economies has spilled over to emerging markets via portfolio capital flows. It finds remarkable differences in the spillover effects of EU vs. US policy uncertainty.
Paolo Angelini, Giuseppe Grande, 08 April 2014
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 Habib, Livio Stracca, 28 February 2014
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, 21 April 2013
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.