“Banks, Government Bonds, and Default: What do the Data Say?” by Stefano Rossi
Finance Seminar
Author:
Stefano Rossi
Purdue University
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.
