Follow the yield: Unravelling the sovereign-bank nexus

Arndt Kund, Mattia Osvaldo Picarelli and Juan Solé

Finance Research Letters, 2025, vol. 80, issue C

Abstract: This paper takes a long-term look at the sovereign-bank nexus, analysing not only the vulnerabilities that led to its build-up, but also the impact of post-GFC financial regulatory reforms, and unconventional monetary policy. Using a panel of euro area countries from 2003–2023, we show that a significant driver of banks’ holdings of domestic sovereign debt is search for yield, which holds for crisis and non-crisis periods. Interestingly, we also document a bond-supply effect that influences banks' decision to buy domestic sovereign debt and how unconventional monetary policy can affect banks’ investment strategies.

Keywords: Sovereign bond holdings; Feedback loop; Financial stability; Crisis; Eurozone (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:80:y:2025:i:c:s1544612325006403

DOI: 10.1016/j.frl.2025.107380

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