Sovereign portfolio composition and bank risk: the case of European banks

Selva Bahar Baziki, María J. Nieto and Rima Turk-Ariss
Additional contact information
Selva Bahar Baziki: Bloomberg
María J. Nieto: Banco de España
Rima Turk-Ariss: Fondo Monetario Internacional
Authors registered in the RePEc Author Service: Rima Turk Ariss

No 2325, Working Papers from Banco de España

Abstract: We extend the literature on the sovereign-bank nexus by examining the composition effects of sovereign portfolios on banks’ risk profile, unlike previous studies which generally analyzed the determinants of banks’ sovereign portfolios or the size effects of these portfolios. We also differ from previous studies with respect to the measures of risk considered and by covering a sample period that goes well beyond the global financial crisis (2009-2018). Drawing on granular data from the European Banking Authority, we find that banks are riskier when their portfolio includes a higher proportion of securities issued by higher-risk sovereigns or when they are themselves domiciled in a country with high sovereign credit risk. Nevertheless, we do not find conclusive evidence that larger holdings of government securities of the country where the bank is incorporated increase bank risk ex-post. However, the risk profile is higher for banks that received government capital injections than for banks that did not receive capital support in the aftermath of the global financial crisis. Banks that received government capital injections are less risky when their portfolio includes a higher proportion of securities issued by higher-risk sovereigns. These results may indicate that regulatory arbitrage motives at these banks are particularly important.

Keywords: banks; sovereign crisis; EU (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 G38 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2023-09
New Economics Papers: this item is included in nep-ban, nep-eec, nep-fmk, nep-ifn and nep-rmg
References: View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Sovereign portfolio composition and bank risk: The case of European banks (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2325

DOI: 10.53479/33599

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