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Sovereign bond holdings and monetary policy operations in the euro area

Ivo J.M. Arnold and Beau Soederhuizen

Journal of Policy Modeling, 2018, vol. 40, issue 6, 1243-1254

Abstract: This paper investigates the relationship between sovereign bond holdings of banks and refinancing operations by the ECB for countries in the euro area. We use data collected by Bruegel as well as a new dataset compiled from the annual statements of national central banks to estimate panel regression models. Our findings support the hypothesis that the ECB’s refinancing operations have increased resident banks’ exposure to domestic sovereign bonds. This is in line with the moral suasion theory advanced in the literature. These results strengthen the case for regulatory changes aimed at reducing the sensitivity of banks to sovereign risk.

Keywords: Monetary policy; Sovereign bonds; Banking system; Euro crisis (search for similar items in EconPapers)
JEL-codes: F34 F36 G21 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:jpolmo:v:40:y:2018:i:6:p:1243-1254