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Why Do Banks in Developing Countries Hold Government Securities?

S. M. Abbas () and Raphael Espinoza ()

No 2016-1, UCL SSEES Economics and Business working paper series from UCL School of Slavonic and East European Studies (SSEES)

Abstract: This paper identifies the determinants of commercial banks' holdings of government paper, using a new cross-sectional dataset on government and private returns for 594 banks from 70 emerging and low-income countries for the year 2005. The paper finds that demand for government securities responds intuitively and sizeably to variations in the mean and variance of government and private returns. Regulatory factors also matter: higher cash reserve requirements tilt banks' portfolios away from government securities and toward riskier private lending while higher capital adequacy requirements work the other way. The association between actual portfolios and the identified determinants is noticeably weaker at low levels of government bond holdings.

Keywords: Government bonds; government securities, mean-variance; CAPM; banks' portfolio choice; regulatory constraints; crowding-out (search for similar items in EconPapers)
JEL-codes: D22 G32 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-ban
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Persistent link: https://EconPapers.repec.org/RePEc:see:wpaper:2016:1

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