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The Political Origin of Home Bias: The Case of Europe

Author

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  • Filippo De Marco
  • Marco Macchiavelli

Abstract

We show that politics is at the root of the banks-sovereign nexus that exacerbated the Eurozone crisis. First, government-owned banks or banks with politicians in the board of directors display higher home bias in sovereign debt compared to privately-owned banks throughout the 2010-2013 period. Second, only government-owned banks increased the home bias during the sovereign crisis (moral suasion). We exploit the fact that equity injections (bail-outs) by domestic governments were not directly targeted to politically connected banks to show that, upon receiving such assistance, only government-owned banks purchase domestic debt. Moral suasion is stronger in countries under stress.

Suggested Citation

  • Filippo De Marco & Marco Macchiavelli, 2016. "The Political Origin of Home Bias: The Case of Europe," Finance and Economics Discussion Series 2016-060, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2016-60
    DOI: 10.17016/FEDS.2016.060
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    File URL: http://www.federalreserve.gov/econresdata/feds/2016/files/2016060pap.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Banks-sovereign nexus ; Home bias ; Government-owned banks ; Banks' recapitalization ; Board of directors;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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