Banks, government bonds, and default: what do the data say?

Gennaioli, Nicola; Martin, Alberto, 1974-; Rossi, Stefano

doi:http://dx.doi.org/10.1016/j.jmoneco.2018.04.011

Banks, government bonds, and default: what do the data say?

License

Citation

Gennaioli N, Martin A, Rossi S. Banks, government bonds, and default: what do the data say?. Journal of Monetary Economics. 2018 Oct;98:98-113. DOI: 10.1016/j.jmoneco.2018.04.011

Abstract

This paper analyzes sovereign bondholdings by 20,000 banks in 191 countries and 20 sovereign default episodes over 1998–2012, establishing two robust facts. First, banks hold many government bonds (on average 9% of assets) in normal times, particularly banks making fewer loans and operating in less financially-developed countries. Second, during default years, banks with the average exposure to government bonds exhibit a lower growth rate of loans than banks without bonds (7-percentage points lower). These results indicate that the “dangerous embrace” between banks and their government plays a key role during sovereign defaults and its strength depends on local conditions.