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Government default, bonds, and bank lending around the world: What do the data say?

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Abstract

We analyze holdings of government bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Relative to existing work, this dataset allows us to study – for both developed and emerging economies – not only the workings of the sovereign default-banking crisis nexus, but also how it comes into existence in the first place. Banks hold many government bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, exposure to government bonds increases, especially for large banks. At the bank level, bondholdings during sovereign default correlate negatively with subsequent lending, and this correlation is mostly due to bonds acquired in pre-default years. These results indicate that in many countries the sovereign default-banking crisis nexus originates in normal times.

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  • Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2013. "Government default, bonds, and bank lending around the world: What do the data say?," Economics Working Papers 1378, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2015.
  • Handle: RePEc:upf:upfgen:1378
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    Cited by:

    1. Viral Acharya & Itamar Drechsler & Philipp Schnabl, 2014. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," Journal of Finance, American Finance Association, vol. 69(6), pages 2689-2739, December.
    2. Tamon Asonuma & Said A Bakhache & Heiko Hesse, 2015. "Is Banks’ Home Bias Good or Bad for Public Debt Sustainability?," IMF Working Papers 15/44, International Monetary Fund.
    3. Benjamin Hebert & Jesse Schreger, 2014. "The Costs of Sovereign Default: Evidence from Argentina," Working Paper 223706, Harvard University OpenScholar.
    4. Luigi Bocola, 2016. "The Pass-Through of Sovereign Risk," Journal of Political Economy, University of Chicago Press, vol. 124(4), pages 879-926.
    5. repec:taf:applec:v:49:y:2017:i:46:p:4679-4703 is not listed on IDEAS
    6. Andrea Beltratti & René M. Stulz, 2015. "Bank sovereign bond holdings, sovereign shock spillovers, and moral hazard during the European crisis," NBER Working Papers 21150, National Bureau of Economic Research, Inc.
    7. Leo de Haan & Jan Willem van den End & Philip Vermeulen, 2017. "Lenders on the storm of wholesale funding shocks: saved by the central bank?," Applied Economics, Taylor & Francis Journals, vol. 49(46), pages 4679-4703, October.
    8. Patricia Gómez-González, 2015. "Financial innovation in sovereign borrowing and public provision of liquidity," Working Papers 1511, Banco de España;Working Papers Homepage.
    9. Correa, Ricardo & Sapriza, Horacio, 2014. "Sovereign Debt Crises," International Finance Discussion Papers 1104, Board of Governors of the Federal Reserve System (U.S.).
    10. Diniz, Andre & Guimaraes, Bernardo, 2014. "Financial disruption as a cost of sovereign default: a quantitative assessment," LSE Research Online Documents on Economics 86329, London School of Economics and Political Science, LSE Library.

    More about this item

    Keywords

    Sovereign Risk; Sovereign Default; Government Bonds;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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