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The invisible hand of the government: "Moral suasion" during the European sovereign debt crisis

Steven Ongena (), Alexander Popov () and Neeltje Van Horen ()

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: Using proprietary data on banks' monthly securities holdings, we find that during the European sovereign debt crisis, domestic banks in fiscally stressed countries were considerably more likely than foreign banks to increase their holdings of domestic sovereign bonds in months with relatively high domestic sovereign bond issuance. This effect is stronger for state-owned banks and for banks with low initial holdings of domestic sovereign bonds, and it is not fuelled by Central Bank liquidity provision. Our results point to a "moral suasion" mechanism, and they are not driven by concurrent risk-shifting, carry-trading, regulatory compliance, or shocks to investment opportunities.

Keywords: Sovereign debt; sovereign-bank loop; moral suasion (search for similar items in EconPapers)
JEL-codes: F34 G21 H63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-eec
Date: 2016-03
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Working Paper: The invisible hand of the government: "Moral suasion" during the European sovereign debt crisis (2016) Downloads
Working Paper: The invisible hand of the government: “Moral suasion” during the European sovereign debt crisis (2016) Downloads
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