Banks, Government Bonds, and Default: What Do the Data Say?

Abstract

We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks increase their exposure to public bonds, especially large banks and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults. This correlation is mostly due to bonds acquired in pre-default years. These findings shed light on alternative theories of the sovereign default-banking crisis nexus.

Keywords: Banks, Government securities, Bonds, Sovereign risk, Return on investment, Sovereign debt defaults, Banking crisis, Sovereign Default, Government Bonds, bond, public bonds, bond returns, sovereign bond, sovereign defaults, central bank, government bond, private credit, demand for bonds, bond return, financial institutions, sovereign bonds, bond prices, financial markets, bond spreads, bond index, international financial statistics, financial intermediation, bond market, domestic financial markets, financial repression, global bond, global bond index, emerging market bond, sovereign bond market, market bond, central banks, debt crisis, debt restructuring, foreign bonds, international financia

JEL Classification: F34, F36, G15, H63