Working Paper: CEPR ID: DP10044
Authors: Nicola Gennaioli; Alberto Martin; Stefano Rossi
Abstract: 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 defaultbanking crisis nexus.
Keywords: government bonds; sovereign default; sovereign risk
JEL Codes: F34; F36; G15; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banks' bondholdings (G21) | lending behavior during sovereign defaults (F34) |
| pre-default bondholdings (G32) | lending decline during defaults (G21) |
| larger bondholdings (G32) | significant reduction in lending during defaults (G33) |
| sovereign defaults (F34) | changes in bank behavior regarding bondholdings (G21) |