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
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: Suggested Citation