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

Filomena Pietrovito and Alberto Pozzolo

International Review of Economics & Finance, 2023, vol. 86, issue C, 666-683

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 the contemporaneous increase in banks’ total assets and the portfolio readjustment from loans to government bonds can be explained by 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 the hypothesis that the banks which increased the most their government bond holdings were also those which reduced more significantly their credit supply.

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)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:86:y:2023:i:c:p:666-683

DOI: 10.1016/j.iref.2023.03.041

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