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Banks, government bonds, and default: what do the data say?

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  • Nicola Gennaioli
  • Alberto Martin

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  • 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 default-banking crisis nexus.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1378.

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Date of creation: Jul 2013
Date of revision: May 2014
Handle: RePEc:upf:upfgen:1378

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Web page: http://www.econ.upf.edu/

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Keywords: Sovereign Risk; Sovereign Default; Government Bonds;

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