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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.

Suggested Citation

  • Koetter, Michael & Popov, Alexander, 2018. "Politics, banks, and sub-sovereign debt: Unholy trinity or divine coincidence?," Discussion Papers 53/2018, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:532018
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Breaking the political link
      by Bruno Duarte in EUnomics on 2018-12-24 08:31:24

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    Cited by:

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    3. Matteo Crosignani, 2015. "Why Are Banks Not Recapitalized During Crises?," Working Papers 203, Oesterreichische Nationalbank (Austrian Central Bank).
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    6. Ohls, Jana, 2017. "Moral suasion in regional government bond markets," Discussion Papers 33/2017, Deutsche Bundesbank.
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    8. Popov, Alexander, 2018. "Sub-sovereign bonds in banks’ portfolios: A role for political connections?," Research Bulletin, European Central Bank, vol. 42.

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    More about this item

    Keywords

    political connections; government-owned banks; sub-sovereign debt;
    All these keywords.

    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 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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