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

Arbeitspapier

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.

Object Details

• ISBN: 978-92-95210-00-4
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ESRB Working Paper Series ; No. 88

Classification and Topics

• Classification: Wirtschaft ; Financial Crises ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; National Debt; Debt Management; Sovereign Debt
• Subject: Banks' sovereign holdings ; sovereign crisis ; moral hazard ; central bank liquidity ; EMU financial fragmentation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Lamas, Matías ; Mencía, Javier
• Event: Veröffentlichung
• (who): European Systemic Risk Board (ESRB), European System of Financial Supervision
• (where): Frankfurt a. M.
• (when): 2019

Further information

• DOI: doi:10.2849/619802
• Handle: http://hdl.handle.net/10419/193595
• Last update: 10.03.2025, 11:42 AM CET