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Bailouts, sovereign risk and bank portfolio choices

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  • Casiraghi, Marco

Abstract

I study the role of sovereign risk in determining the effects of expected bailouts on banks’ portfolio decisions. Empirically, data on Italian banks show that they decrease lending to firms and increase purchases of government bonds following an increase in the probability of a bailout, if the risk of sovereign default is sufficiently low. Crucially, the portfolio adjustment becomes weaker and eventually reverses sign as sovereign risk increases. To interpret these results, I develop a model in which the relation between the bailout probability and the corresponding payoff to bank owners (“bailout rents”) depends on sovereign risk. The model’s predictions are consistent with the key features of the data.

Suggested Citation

  • Casiraghi, Marco, 2020. "Bailouts, sovereign risk and bank portfolio choices," Journal of Banking & Finance, Elsevier, vol. 119(C).
    • Handle: RePEc:eee:jbfina:v:119:y:2020:i:c:s0378426620301722
    DOI: 10.1016/j.jbankfin.2020.105906
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    More about this item

    Keywords

    Bank Bailout; Government bonds; Bank lending; Sovereign risk; Credit rating;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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