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What drives sovereign debt portfolios of banks in a crisis context?

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Listed:
  • Matías Lamas

    (Banco de España)

  • Javier Mencía

    (Banco de España)

Abstract

We study determinants of sovereign portfolios of Spanish banks over a long time-span, starting in 2008. Our findings challenge the view that banks engaged in moral hazard strategies to exploit the regulatory treatment of sovereign exposures. In particular, we show that being a weakly capitalized bank is not related to higher holdings of domestic sovereign debt. While a strong link is present between central bank liquidity support and sovereign holdings, opportunistic strategies or reach-for-yield behavior appear to be limited to the non-domestic sovereign portfolio of well-capitalized banks, which might have taken advantage of their higher risk-bearing capacity to gain exposure (via central bank liquidity) to the set of riskier sovereign bonds. Furthermore, we document that financial fragmentation in EMU markets has played a key role in reshaping sovereign portfolios of banks. Overall, our results have important implications for the ongoing discussion on the optimal design of the risk-weighted capital framework of banks.

Suggested Citation

  • Matías Lamas & Javier Mencía, 2018. "What drives sovereign debt portfolios of banks in a crisis context?," Working Papers 1843, Banco de España.
  • Handle: RePEc:bde:wpaper:1843
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    References listed on IDEAS

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    Cited by:

    1. Hoffmann, Peter & Kremer, Manfred & Zaharia, Sonia, 2020. "Financial integration in Europe through the lens of composite indicators," Economics Letters, Elsevier, vol. 194(C).
    2. Mariña Martínez-Malvar & Laura Baselga-Pascual, 2020. "Bank Risk Determinants in Latin America," Risks, MDPI, vol. 8(3), pages 1-20, September.
    3. Maria Manuel Campos & Ana Rita Mateus, 2019. "Sovereign exposures in the Portuguese banking system: determinants and dynamics," Working Papers w201916, Banco de Portugal, Economics and Research Department.
    4. Carlos Alberto Piscarreta Pinto Ferreira, 2021. "Does Public Debt Ownership Structure Matter for a Borrowing Country?," Working Papers REM 2021/0190, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    5. Micossi, Stefano & Peirce, Fabrizia, 2020. "Overcoming the gridlock in EMU decision-making," CEPS Papers 26688, Centre for European Policy Studies.
    6. Antonija Buljan & Milan Deskar-Skrbic & Mirna Dumicic, 2020. "What drives banks’ appetite for sovereign debt in CEE countries?," Public Sector Economics, Institute of Public Finance, vol. 44(2), pages 179-201.

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    More about this item

    Keywords

    banks’ sovereign holdings; sovereign crisis; moral hazard; central bank liquidity; EMU financial fragmentation;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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