Banks’ Home-Bias in Government Bonds Holdings: Will the Supply of ESBies Create Its Own Demand?

24 Pages Posted: 26 Jun 2018 Last revised: 13 Jul 2018

Date Written: June 12, 2018

Abstract

The bank literature has documented theoretical and empirical evidence of a “diabolic loop” in the sovereign-bank nexus. Banks have a concentrated risk exposure in domestic government bonds. In the European banking union, this has led to a proposal to create European safe bonds, ESBies, which would facilitate geographical sovereign diversification, hence contributing to bank stability. But will a supply of ESBies create its own demand?

The paper offers two new explanations for the home bias in banks’ government bond holdings: a sovereign-based rating cap on banks and the existence of a ‘bank tax’. These are complementary to the three explanations mentioned in the literature: risk shifting, a gamble for resurrection and moral suasion. Collectively, they cast doubt on a demand-led approach to developing a market for safe sovereign-bond backed securities.

Keywords: ESBies, Sovereign-Bonds Backed Securities, SBBS

JEL Classification: G01, G18, G21, G28

Suggested Citation

Dermine, Jean, Banks’ Home-Bias in Government Bonds Holdings: Will the Supply of ESBies Create Its Own Demand? (June 12, 2018). Available at SSRN: https://ssrn.com/abstract=3194331 or http://dx.doi.org/10.2139/ssrn.3194331

Jean Dermine (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 60 72 41 33 (Phone)

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