The Political Origin of Home Bias: The Case of Europe

Filippo De Marco and Marco Macchiavelli

No 2016-060, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We show that politics is at the root of the banks-sovereign nexus that exacerbated the Eurozone crisis. First, government-owned banks or banks with politicians in the board of directors display higher home bias in sovereign debt compared to privately-owned banks throughout the 2010-2013 period. Second, only government-owned banks increased the home bias during the sovereign crisis (moral suasion). We exploit the fact that equity injections (bail-outs) by domestic governments were not directly targeted to politically connected banks to show that, upon receiving such assistance, only government-owned banks purchase domestic debt. Moral suasion is stronger in countries under stress.

Keywords: Banks-sovereign nexus; Home bias; Government-owned banks; Banks' recapitalization; boards of directors (search for similar items in EconPapers)
JEL-codes: D72 G01 G11 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2016-07-08
New Economics Papers: this item is included in nep-eec and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (67)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2016-60

DOI: 10.17016/FEDS.2016.060

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