Bond issuance and the funding choices of European banks: The consequences of public debt

Michela Rancan, Jessica Cariboni, Kevin Keasey and Francesco Vallascas

Journal of Empirical Finance, 2023, vol. 74, issue C

Abstract: European banks raise less funds in the bond market when there is a larger public debt in their national economies and this is reflected in lower leverage. We exploit numerous sources of heterogeneity in our data to demonstrate this result is driven by a crowding out effect from the public arena and not by a sovereign risk channel or political influence. The crowding out effect is stronger for less internationally active or smaller banks, and in banks characterized by more traditional business models. Our findings indicate that additional capital requirements on sovereign bond holdings can also influence bank funding composition via a decrease in the demand for sovereign bonds by the banking industry. The specific effect of these regulatory initiatives is critically dependent on bank characteristics.

Keywords: Bank bonds; Sovereign debt; European banks; Regulation (search for similar items in EconPapers)
JEL-codes: G21 G28 H63 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:74:y:2023:i:c:s0927539823000750

DOI: 10.1016/j.jempfin.2023.101417

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