Economics at your fingertips  

Bank capital, government bond holdings, and sovereign debt capacity

Matteo Crosignani ()

Journal of Financial Economics, 2021, vol. 141, issue 2, 693-704

Abstract: I develop a model where the sovereign debt capacity depends on the capitalization of domestic banks. Low-capital banks optimally tilt their government bond portfolio toward domestic securities, linking their destiny to that of the sovereign. If the sovereign risk is sufficiently high, low-capital banks lend less to the productive sector to further increase their holdings of domestic government bonds, lowering sovereign yields. In this case, a government that regulates bank capital faces a trade-off. On the one hand, high-capital banks lend more to the productive sector. On the other hand, low-capital banks support the home sovereign debt capacity.

Keywords: Bank capital; Sovereign risk; Government bonds; Bank-Sovereign nexus (search for similar items in EconPapers)
JEL-codes: E44 F33 G21 G28 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.jfineco.2021.04.005

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

Page updated 2023-06-15
Handle: RePEc:eee:jfinec:v:141:y:2021:i:2:p:693-704