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Domestic banks as lightning rods? Home bias and information during the Eurozone crisis
Version 2 2023-06-16, 09:46
Version 1 2023-06-13, 14:15
journal contribution
posted on 2023-06-16, 09:46 authored by Orkun SakaEuropean banks have been criticized for holding excessive domestic government debt during the recent Eurozone crisis, which may have intensified the diabolic loop between sovereign and bank credit risks. By using a novel bank-level data set covering the entire timeline of the Eurozone crisis, I first reconfirm that the crisis led to the reallocation of sovereign debt from foreign to domestic banks. In contrast to the recent literature focusing only on sovereign debt, I show that the banks' private-sector exposures were (at least) equally affected by the rise in home bias. Consistent with this pattern, I propose a new debt reallocation channel based on informational frictions and show that the informationally closer foreign banks increase their relative exposures when the sovereign risk rises. The effect of informational closeness is economically meaningful and robust to the use of different information measures and controls for alternative channels of sovereign debt reallocation.
History
Publication status
- Published
File Version
- Published version
Journal
Journal of Money, Credit and BankingISSN
0022-2879Publisher
WileyExternal DOI
Issue
S1Volume
52Page range
273-305Department affiliated with
- Accounting and Finance Publications
Research groups affiliated with
- Business and Finance Research Group Publications
Full text available
- No
Peer reviewed?
- Yes
Legacy Posted Date
2019-12-10First Open Access (FOA) Date
2020-11-09First Compliant Deposit (FCD) Date
2019-12-09Usage metrics
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