International Evidence on the Determinants of Domestic Sovereign Debt Bank Holdings
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International Evidence on the Determinants of Domestic Sovereign Debt Bank Holdings Dimitris K. Chronopoulos 1
2
& George Dotsis & Nikolaos T. Milonas
2
Received: 10 September 2018 / Revised: 8 August 2019 / Accepted: 2 September 2019 # The Author(s) 2019
Abstract
In this paper, we examine the determinants of bank holdings of domestic sovereign debt with a panel dataset of 295 banks in 35 countries between 2002 and 2013. The findings indicate that the structure of bank ownership (domestic, foreign, or government ownership), the quality of governance, and the level of financial development of the countries in which banks operate all determine the level of home bias. Specifically, we find that domestic banks tend to hold more domestic sovereign debt relative to their foreign counterparts. We also provide evidence that home bias is even stronger when the domestic bank is controlled by its government. Moreover, home bias increases when government bonds are more risky, home governments are less effective, and when banking systems are less financially developed. Overall, we find that banks’ home bias in holding sovereign debt is an international phenomenon that is determined by both bank- and country-specific factors. Keywords Sovereign debt . Home bias . Moral suasion . Government ownership JEL classification G11 . G21
1 Introduction The sovereign debt crisis erupted in Europe after the collapse of Lehman Brothers. This crisis has ignited research interest in the behavior of sovereign debt holders. A major concern during * Dimitris K. Chronopoulos [email protected] George Dotsis [email protected] Nikolaos T. Milonas [email protected]
1
School of Management, University of St. Andrews, Gateway Building, Scotland KY16 9RJ, UK
2
Department of Economics, National and Kapodistrian University of Athens, Athens, Greece
Journal of Financial Services Research
the Eurozone crisis was the negative feedback loop between the credit risk of sovereign debt and banks. Recent EU-wide stress tests have provided bank-level data for researchers to study sovereign debt holdings.1 The research has shown that European banks have a significant home bias in their holdings of sovereign bonds. In this paper we explore whether home bias applies only to European banks or is an international phenomenon despite the many legal, regulatory, ownership, and cultural differences that exist between banks as well as across countries. In particular, we seek to answer the following questions: Are banks owned by foreign entities less prone to home bias in their bond holdings? Does government ownership of banks affect the holdings of domestic sovereign debt? Do government-owned banks tend to buy more domestic sovereign bonds when credit conditions deteriorate? Does a country’s level of financial system development, governance, and control over corruption affect the banks’ holdings of domestic sovereign debt? Is the home bias in European banks a unique phenomenon or can we observe it internationally? One of the reasons for the vicious circl
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