Domestic Banks as Lightning Rods? Home Bias and Information During the Eurozone Crisis

40 Pages Posted: 27 Nov 2019

See all articles by Orkun Saka

Orkun Saka

University of Sussex; London School of Economics & Political Science (LSE)

Date Written: 2019

Abstract

European banks have been criticized for holding excessive domestic government debt during the recent Eurozone crisis, which may have intensified the diabolic loop between sovereign and bank credit risks. By using a novel bank-level dataset covering the entire timeline of the Eurozone crisis, I first re-confirm that the crisis led to the reallocation of sovereign debt from foreign to domestic banks. In contrast to the recent literature focusing only on sovereign debt, I show that the banks' private sector exposures were (at least) equally affected by the rise in home bias. Consistent with this pattern, I propose a new debt reallocation channel based on informational frictions and show that the informationally closer foreign banks increase their relative exposures when the sovereign risk rises. The effect of informational closeness is economically meaningful and robust to the use of different information measures and controls for alternative channels of sovereign debt reallocation.

Keywords: home bias, information asymmetries, Eurozone crisis, sovereign debt

JEL Classification: F210, F340, F360, G010, G110, G210

Suggested Citation

Saka, Orkun, Domestic Banks as Lightning Rods? Home Bias and Information During the Eurozone Crisis (2019). CESifo Working Paper No. 7939. Available at SSRN: https://ssrn.com/abstract=3490402

Orkun Saka (Contact Author)

University of Sussex ( email )

Sussex House
Falmer
Brighton, Sussex BNI 9RH
United Kingdom

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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