The Political Origin of Home Bias: The Case of Europe

48 Pages Posted: 8 Aug 2016 Last revised: 21 Sep 2016

See all articles by Filippo De Marco

Filippo De Marco

Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; CEPR Financial Economics

Marco Macchiavelli

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: July, 2016

Abstract

We show that politics is at the root of the banks-sovereign nexus that exacerbated the Eurozone crisis. First, government-owned banks or banks with politicians in the board of directors display higher home bias in sovereign debt compared to privately-owned banks throughout the 2010-2013 period. Second, only government-owned banks increased the home bias during the sovereign crisis (moral suasion). We exploit the fact that equity injections (bail-outs) by domestic governments were not directly targeted to politically connected banks to show that, upon receiving such assistance, only government-owned banks purchase domestic debt. Moral suasion is stronger in countries under stress.

Keywords: Banks-sovereign nexus, Home bias, Government-owned banks, Banks', recapitalization, boards of directors

JEL Classification: D72, G01, G11

Suggested Citation

De Marco, Filippo and Macchiavelli, Marco, The Political Origin of Home Bias: The Case of Europe (July, 2016). FEDS Working Paper No. 2016-60, Available at SSRN: https://ssrn.com/abstract=2819398 or http://dx.doi.org/10.17016/FEDS.2016.060

Filippo De Marco (Contact Author)

Bocconi University - Department of Finance ( email )

Department of Finance
Via Roentgen 1
Milano, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

CEPR Financial Economics ( email )

London
United Kingdom

Marco Macchiavelli

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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