Domestic banks as lightning rods? Home bias and information during Eurozone crisis

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Title: Domestic banks as lightning rods? Home bias and information during Eurozone crisis
ISBN: 978-952-323-260-0
Author: Saka, Orkun
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2019
Series number: 3/2019
Year of publication: 2019
Publication date: 5.2.2019
Pages: 61
Subject (yso): rahoitusmarkkinat; euroalue; kriisit; riskit; pankit; valtionvelka; luotot; informaatio
JEL: F21; F34; F36; G01; G11; G21
Other keywords: Home bias; Information asymmetries; Eurozone crisis; Sovereign debt
Abstract: European banks have been criticized for holding excessive domestic government debt during economic downturns, which may have intensified the diabolic loop between sovereign and bank credit risks. By using a novel bank-level dataset covering the entire timeline of the Eurozone crisis, I first re-confirm that the crisis led to the reallocation of sovereign debt from foreign to domestic banks. This reallocation was only visible for banks as opposed to other domestic private agents and it cannot be explained by the banks' risk-shifting tendency. In contrast to the recent literature focusing only on sovereign debt, I show that banks' private sector exposures were (at least) equally affected by a rise in home bias. Finally, consistent with these patterns, I propose a new debt reallocation channel based on informational frictions and show that informationally closer foreign banks increase their relative exposures when sovereign risk rises. The effect of informational closeness is economically meaningful and robust to the use of different information measures and controls for alternative channels of sovereign debt reallocation.
Rights: https://helda.helsinki.fi/bof/copyright


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