DP10044 Banks, Government Bonds, and Default: What do the Data Say?

Author(s): Nicola Gennaioli, Alberto Martín, Stefano Rossi
Publication Date: June 2014
Keyword(s): government bonds, sovereign default, sovereign risk
JEL(s): F34, F36, G15, H63
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10044

We analyze holdings of public bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Banks hold many public bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, banks increase their exposure to public bonds, especially large banks and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults. This correlation is mostly due to bonds acquired in pre-default years. These findings shed light on alternative theories of the sovereign defaultbanking crisis nexus.