Paper #1378

Title:

Banks, government bonds, and default: what do the data say?

Authors:

Nicola Gennaioli, Alberto Martin and Stefano Rossi

Date:

July 2013

Abstract:

We analyze empirically the holdings of sovereign bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. We document two robust facts. First, banks hold many government bonds (on average 9% of their assets) in normal times, particularly banks that make fewer loans and operate in less financially-developed countries. Second, within a country and during a default year, bank�s holdings of sovereign bonds correlate negatively with subsequent lending. Quantitatively, the average exposure to bonds is approximately associated with a 7-percentage point lower growth rate of loans relative to a bank holding no bonds. This negative correlation is stronger in defaulting countries that are economically and institutionally more developed. These results indicate that the �dangerous embrace� between banks and their government plays a key role in many sovereign defaults around the world, and its strength depends on local conditions.

Keywords:

Sovereign Risk, Sovereign Default, Government Bonds

JEL codes:

F34, F36, G15, H63

Area of Research:

Macroeconomics and International Economics

Published in:

Journal of Monetary Economics, 98, 2018, 98-113

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