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Bank asset reallocation and sovereign debt

Author

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  • Michele Fratianni

    () (Indiana University, Kelly School of Business, Bloomington US, Univ. Plitecnica Marche and MoFiR)

  • Francesco Marchionne

    () (Nottingham Trent University, Division of Economics)

Abstract

This paper examines how banks around the world have resized and reallocated their earning assets in response to the subprime and sovereign debt crises. We focus especially on the interaction between sovereign debt and the bank asset allocation process. After the crisis we observe a general substitution away from loans and in favor of securities. Our econometric findings corroborate that banks have readjusted the composition of their assets and the overall regulatory credit risk by substituting securities for loans. Banks, furthermore, have also been sensitive to those variables that are of direct interest to the regulator. The picture that emerges is a mutual protection pact regime, in which high-debt governments exert pressure on banks-- either through the regulatory system or through moral suasion-- to privilege the purchase of government securities over credit to the private sector in exchange for receiving protection against default.

Suggested Citation

  • Michele Fratianni & Francesco Marchionne, 2014. "Bank asset reallocation and sovereign debt," Mo.Fi.R. Working Papers 100, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  • Handle: RePEc:anc:wmofir:100
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    References listed on IDEAS

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    Cited by:

    1. Michele Fratianni & Francesco Marchionne, 2015. "De-leveraging, de-risking and moral suasion in the banking sector," Mo.Fi.R. Working Papers 103, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.

    More about this item

    Keywords

    crisis; loans; mutual protection pacr; regulator; securities;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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