Is Banks’ Home Bias Good or Bad for Public Debt Sustainability?

38 Pages Posted: 26 Mar 2015

See all articles by Tamon Asonuma

Tamon Asonuma

International Monetary Fund Research Department

Said Bakhache

International Monetary Fund (IMF)

Heiko Hesse

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2015

Abstract

Motivated by the recent increase in domestic banks’ holdings of domestic sovereign debt (i.e., home bias) in the European periphery, this paper analyzes implications of banks’ home bias for the sovereign’s debt sustainability. The main findings, based on a sample of advanced (AM) and emerging market (EM) economies, suggest that home bias generally reduces the cost of borrowing for AMs and EMs when debt levels are moderate to high. A worsening of market sentiments appears to diminish the favorable impact of home bias on cost of borrowing particularly for EMs. In addition, for AMs and EMs, higher home bias is associated with higher debt levels, and less responsive fiscal policy. The findings suggest that home bias indeed matters for debt sustainability: Home bias may provide fiscal breathing space, but delays in fiscal consolidation may actually delay problems until debt reaches dangerously high levels.

Keywords: Banking sector, Sovereign debt, Public debt, Fiscal policy, Debt sustainability, Developed countries, Developing countries, Banks, Home Bias, Government Bond Yields, Primary Balance, Sovereign-bank Nexus, market, markets, bond spreads

JEL Classification: G21, H62, H63

Suggested Citation

Asonuma, Tamon and Bakhache, Said and Hesse, Heiko, Is Banks’ Home Bias Good or Bad for Public Debt Sustainability? (February 2015). IMF Working Paper No. 15/44. Available at SSRN: https://ssrn.com/abstract=2585430

Tamon Asonuma (Contact Author)

International Monetary Fund Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Said Bakhache

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Heiko Hesse

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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