“Banks, Government Bonds, and Default: What do the Data Say?” by Stefano Rossi
We document government bondholdings by over 18,000 banks in 185 countries and the role of these bonds in 18 sovereign debt crises over 1998-2012. Banks on average hold 9% of their assets in government bonds, particularly in less financially-developed countries. During crises, banks – particularly larger ones – significantly increase their bondholdings, the more so the higher are expected bond returns. Bondholdings – both those acquired in normal times and during crises – correlate with a subsequent decrease in lending during crises. However, bonds acquired in normal times play a sizably large role during sovereign crises. These findings shed light on alternative theories of the sovereign default-banking crisis nexus.