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Sovereign Debt Holding and Bank Sensitivity toward Market Risk: An Alternative View of the Bank–Sovereign Problem

Author

Listed:
  • Aneta Hryckiewicz

    (Kozminski University)

  • Petra Pawlowski

    (Kozminski University)

  • Piotr Michal Mazur

    (Kozminski University)

  • Marcin Borsukb

    (European Central Bank, Institute of Economics Polish Academy of Science, University of Cape Town, National Bank of Poland)

Abstract

Government bonds have always been a popular type of investment for banks. However, this trend has been further enhanced by the provisions of numerous banking regulations aimed at promoting investment in these securities. We empirically test the role of the fiscal incentive provided by Polish authorities aimed at encouraging banks to invest in sovereign debt. Additionally, we verify whether and how increased sovereign debt holding has exposed banks to fair-value accounting and test the consequent market risk related to such investment. To this end, we use unique quarterly balance sheet data on sovereign holdings at Polish banks for the period from 2008:Q1 to 2017:Q4, organized in line with International Financial Reporting Standards (IFRS) as “available for sale,” “held for trading,” and “held to maturity.” Our regression results evidence that fiscal incentives greatly increase banks’ bias towards sovereign debt while reducing other investment. More importantly, our findings document that banks have enlarged the share of sovereign debt heavily exposed to market changes, primarily holding it under “available for sale.” Our stress tests document that a yield curve shock might leave less-capitalized banks with the shortage of regulatory capital. Our findings seem particularly important today, in the context of the COVID-19 pandemic, when the deteriorating fiscal situation of many countries may give a rise to a bond-yield shock and force banks to include potential losses in the regulatory capital.

Suggested Citation

  • Aneta Hryckiewicz & Petra Pawlowski & Piotr Michal Mazur & Marcin Borsukb, 2022. "Sovereign Debt Holding and Bank Sensitivity toward Market Risk: An Alternative View of the Bank–Sovereign Problem," International Journal of Central Banking, International Journal of Central Banking, vol. 18(5), pages 1-52, December.
  • Handle: RePEc:ijc:ijcjou:y:2022:q:5:a:1
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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