The Political Origin of Home Bias: The Case of Europe
48 Pages Posted: 8 Aug 2016 Last revised: 21 Sep 2016
Date Written: July, 2016
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: Suggested Citation