Did small banks trade-off lending with government bond purchases during the Sovereign debt crisis?

Filomena Pietrovito () and Alberto Pozzolo

Economics & Statistics Discussion Papers from University of Molise, Department of Economics

Abstract: At the beginning of the decade, many banks in euro-area periphery countries shifted their portfolios from corporate lending towards sovereign debt holdings. According to some scholars, this was the result of the moral suasion exerted by domestic authorities; others suggest instead that it was the outcome of a free choice of weak banks that bet-for-resurrection increasing the holdings of risky, high yielding government bonds. Our analysis shows that a contemporaneous increase in banks’ total assets and a portfolio readjustment from loans to government bonds is consistent with a surge in the risk-premium required by banks on corporate lending. After briefly describing our hypothesis within a simple model of a bank’s portfolio choice, we test its empirical implications on a large sample of individual loan data granted by over 100 Italian small banks during the post sovereign debt crisis period (2012-2014). Our results provide convincing evidence in support of our hypothesis.

Keywords: Credit Supply; Government bond purchases; Sovereign debt crisis; Small banks; Bank-firm relationship (search for similar items in EconPapers)
JEL-codes: E51 G21 (search for similar items in EconPapers)
Pages: 42
Date: 2022-04-11
New Economics Papers: this item is included in nep-ban, nep-eec, nep-fdg and nep-mac
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Published in International Review of Economics and Finance, Vol. 86, 2023, pp. 666-683, https://doi.org/10.1016/j.iref.2023.03.041

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Journal Article: Did small banks trade off lending with government bond purchases during the Sovereign debt crisis? (2023)
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