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Determinants and Valuation Effects of the Home Bias in European Banks’ Sovereign Debt Portfolios

40 Pages Posted: 2 Jul 2015 Last revised: 25 Sep 2015

Bálint L. Horváth

University of Bristol

Harry Huizinga

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR)

Vasso Ioannidou

Lancaster University - Management School; Centre for Economic Policy Research (CEPR)

Date Written: June 2, 2015

Abstract

We document that large European banks hold sovereign debt portfolios heavily biased toward domestic government debt. This bias is stronger if the sovereign is risky and shareholder rights are strong, as evidence of a risk-shifting explanation of the home bias. In addition, the bias is stronger if the sovereign is risky and the government has positive ownership in the bank, as evidence of a government pressure channel. The home bias is positively valued by the stock market, as reflected by a positive association between the home bias and Tobin’s q. The home bias premium declines with domestic sovereign risk, but less so for highly leveraged banks, suggesting that both the risk-shifting and government pressure channels are operative. The European Central Bank’s large injections of liquidity in December 2011 and February 2012 reduced the marginal value of the home bias by allowing banks to expand their exposure to domestic government debt.

Keywords: Sovereign debt crisis, Home bias, Risk-shifting, Moral suasion, Shareholder rights, Government ownership, Bank valuation, LTRO

JEL Classification: G01, G21, G28, G14, G15, F3

Suggested Citation

Horváth, Bálint L. and Huizinga, Harry and Ioannidou, Vasso, Determinants and Valuation Effects of the Home Bias in European Banks’ Sovereign Debt Portfolios (June 2, 2015). Available at SSRN: https://ssrn.com/abstract=2624906 or http://dx.doi.org/10.2139/ssrn.2624906

Bálint Horváth

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Harry Huizinga

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2623 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Vasso Ioannidou (Contact Author)

Lancaster University - Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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