Banks, Government Bonds, and Default: What do the Data Say?

By Nicola Gennaioli, Alberto Martin, Stefano Rossi

July 8, 2014

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Nicola Gennaioli, Alberto Martin, and Stefano Rossi. Banks, Government Bonds, and Default: What do the Data Say?, (USA: International Monetary Fund, 2014) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks increase their exposure to public bonds, especially large banks and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults. This correlation is mostly due to bonds acquired in pre-default years. These findings shed light on alternative theories of the sovereign default-banking crisis nexus.

Subject: Bank credit, Banking, Bonds, Financial crises, Financial institutions, Financial sector policy and analysis, Loans, Sovereign bonds, Stress testing

Keywords: Balance sheet, Bank assets, Bank bondholdings, Bank characteristic, Bank level, Bondholdings correspond, Bonds, Central bank, Europe, Eurozone bank, Government Bonds, Loans, Loan-to-asset ratio, Sovereign bonds, Sovereign Default, Sovereign Risk, Stress testing, WP

Publication Details

Pages:

53
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/120
Stock No:

WPIEA2014120
ISBN:

9781498391993
ISSN:

1018-5941

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