DP11153 The invisible hand of the government: "Moral suasion" during the European sovereign debt crisis

• Neeltje van Horen Steven Ongena Alexander Popov
3 Mar 2016

Using proprietary data on banks’ monthly securities holdings, we find that during the European
sovereign debt crisis, domestic banks in fiscally stressed countries were considerably more
likely than foreign banks to increase their holdings of domestic sovereign bonds in months with
relatively high domestic sovereign bond issuance. This effect is stronger for state‐owned banks
and for banks with low initial holdings of domestic sovereign bonds, and it is not fuelled by
Central Bank liquidity provision. Our results point to a “moral suasion” mechanism, and they
are not driven by concurrent risk‐shifting, carry‐trading, regulatory compliance, or shocks to
investment opportunities.