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Domestic banks as lightning rods? Home bias during the eurozone crisis. CEPS Working Document No 2018/03, March 2018

Saka, Orkun (2018) Domestic banks as lightning rods? Home bias during the eurozone crisis. CEPS Working Document No 2018/03, March 2018. [Working Paper]

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    Abstract

    European banks have been criticized for holding excessive domestic government debt during economic downturns, which has been interpreted as indicative evidence of moral suasion. 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. This reallocation was only visible for banks as opposed to other domestic private agents and it cannot be explained by the banks’ risk-shifting tendency. In contrast to the recent literature focusing only on sovereign debt, I show that banks’ private sector exposures were (at least) equally affected by a rise in home bias. Finally, I propose a new debt reallocation channel based on informational frictions and show that crisis-country debt was not only reallocated to domestic banks, but also to the informationally closer foreign banks. My results imply that informational asymmetries among banks played a key role in the recent fragmentation across eurozone debt markets.

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    Item Type: Working Paper
    Uncontrolled Keywords: Home bias; Information asymmetries; Eurozone crisis; Sovereign debt
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > banks/financial markets
    EU policies and themes > Policies & related activities > economic and financial affairs > EMU/EMS/euro
    EU policies and themes > Policies & related activities > economic and financial affairs > monetary policy
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Centre for European Policy Studies (Brussels) > CEPS Working Documents
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 28 Mar 2018 11:44
    Number of Pages: 54
    Last Modified: 28 Mar 2018 11:44
    URI: http://aei.pitt.edu/id/eprint/93679

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