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Politics, banks, and sub-sovereign debt: unholy trinity or divine coincidence?

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  • Koetter, Michael
  • Popov, Alexander

Abstract

We exploit election-driven turnover in State and local governments in Germany to study how banks adjust their securities portfolios in response to the loss of political connections. We find that local savings banks, which are owned by their host county and supervised by local politicians, increase significantly their holdings of home-State sovereign bonds when the local government and the State government are dominated by different political parties. Banks’ holdings of other securities, like federal bonds, bonds issued by other States, or stocks, are not affected by election outcomes. We argue that banks use sub-sovereign bond purchases to gain access to politically distant government authorities. JEL Classification: G21, H63, P16

Suggested Citation

  • Koetter, Michael & Popov, Alexander, 2018. "Politics, banks, and sub-sovereign debt: unholy trinity or divine coincidence?," Working Paper Series 2146, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20182146
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    1. Breaking the political link
      by Bruno Duarte in EUnomics on 2018-12-24 08:31:24

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    Cited by:

    1. Suarez, Javier & Sánchez Serrano, Antonio, 2018. "Approaching non-performing loans from a macroprudential angle," Report of the Advisory Scientific Committee 7, European Systemic Risk Board.
    2. repec:ecb:ecbrbu:2018:0042:1 is not listed on IDEAS
    3. repec:eee:empfin:v:49:y:2018:i:c:p:247-262 is not listed on IDEAS
    4. Breckenfelder, Johannes & Schwaab, Bernd, 2018. "Bank to sovereign risk spillovers across borders: Evidence from the ECB’s Comprehensive Assessment," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 247-262.
    5. repec:ecb:ecbrbu:2018:0042: is not listed on IDEAS

    More about this item

    Keywords

    government-owned banks; political connections; sub-sovereign debt;

    JEL classification:

    • 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
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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