Did small banks trade-off lending with government bond purchases during the Sovereign debt crisis?
Filomena Pietrovito () and
Alberto Pozzolo ()
Economics & Statistics Discussion Papers from University of Molise, Department of Economics
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 a contemporaneous increase in banksâ€™ total assets and a portfolio readjustment from loans to government bonds is consistent with a surge in the risk-premium required by banks on corporate lending. After briefly describing our hypothesis within a simple model of a bankâ€™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 our hypothesis.
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)
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Persistent link: https://EconPapers.repec.org/RePEc:mol:ecsdps:esdp22083
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