The euro area bias and the role of financial centres

This paper investigates the euro area bias—a stronger preference for euro area securities in the cross‐border portfolio of euro area residents with respect to the prediction of an international finance gravity model. Compared with previous studies, we disentangle different partitions of the euro area and, crucially, isolate euro area financial centres, finding some novel results. First, the euro area bias is not always present and remarkably weak for securities issued by euro area high‐rating economies, those that would be expected to provide better insurance during crisis periods. Second, the extent of the euro area bias could be overstated, because euro area financial centres may conceal round‐tripping flows from euro area low‐rating economies. Finally, in the case of equity, the euro area bias did not decline during the crisis period but, in the case of debt issued by euro area low‐rating economies, unsurprisingly, weakened. The decline in exposure towards euro area debt securities was common among all cross‐border investors, not a specific retrenchment of euro area investors. Overall, our results call for a prudent treatment of cross‐border financial statistics in the presence of a financial centre bias.