What drives sovereign debt portfolios of banks in a crisis context?

Matías Lamas and Javier Mencia (javier.mencia@bde.es)

No 88, ESRB Working Paper Series from European Systemic Risk Board

Abstract: We study determinants of sovereign portfolios of Spanish banks over a long time-span, starting in 2008. Our findings challenge the view that banks engaged in moral hazard strategies to exploit the regulatory treatment of sovereign exposures. In particular, we show that being a weakly capitalized bank is not related to higher holdings of domestic sovereign debt. While a strong link is present between central bank liquidity support and sovereign holdings, opportunistic strategies or reach-for-yield behavior appear to be limited to the non-domestic sovereign portfolio of well-capitalized banks, which might have taken advantage of their higher risk-bearing capacity to gain exposure (via central bank liquidity) to the set of riskier sovereign bonds. Furthermore, we document that financial fragmentation in EMU markets has played a key role in reshaping sovereign portfolios of banks. Overall, our results have important implications for the ongoing discussion on the optimal design of the risk-weighted capital framework of banks.

Keywords: banks´ sovereign holdings; central bank liquidity; EMU financial fragmentation; moral hazard; sovereign crisis (search for similar items in EconPapers)
Date: 2019-03
New Economics Papers: this item is included in nep-ban and nep-eec
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: What drives sovereign debt portfolios of banks in a crisis context? (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:201988

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