The Invisible Hand of the Government: 'Moral Suasion' During the European Sovereign Debt Crisis

66 Pages Posted: 12 Mar 2016 Last revised: 21 Jul 2018

See all articles by Steven Ongena

Steven Ongena

University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)

Alexander A. Popov

European Central Bank (ECB)

Neeltje van Horen

Bank of England; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: July 11, 2018

Abstract

Using proprietary data on banks’ monthly securities holdings, we show that during the European sovereign debt crisis, domestic banks in fiscally stressed countries were considerably more likely than foreign banks to increase their holdings of domestic sovereign bonds during months when the government needed to roll over a relatively large amount of maturing debt. This result cannot be explained by risk shifting, carry trading, or regulatory compliance. Banks under the influence of the government, small banks, and banks with weaker balance sheets were especially prone to ‘moral suasion’. We also find some evidence of credit contraction to households following months with high government refinancing need.

Keywords: Sovereign debt, sovereign-bank loop, moral suasion

JEL Classification: F34, G21, H63

Suggested Citation

Ongena, Steven R. G. and Popov, Alexander A. and van Horen, Neeltje, The Invisible Hand of the Government: 'Moral Suasion' During the European Sovereign Debt Crisis (July 11, 2018). De Nederlandsche Bank Working Paper No. 505, Available at SSRN: https://ssrn.com/abstract=2745767 or http://dx.doi.org/10.2139/ssrn.2745767

Steven R. G. Ongena

University of Zurich - Department Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

NTNU Business School ( email )

Norway

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Alexander A. Popov (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Neeltje Van Horen

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://www.bankofengland.co.uk/research/Researchers/neeltje-van-horen

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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