The Political Origin of Home Bias: The Case of Europe
Abstract: We show that politics is at the root of the banks-sovereign nexus that exacerbated the Eurozone crisis. First, government-owned banks or banks with politicians in the board of directors display higher home bias in sovereign debt compared to privately-owned banks throughout the 2010-2013 period. Second, only government-owned banks increased the home bias during the sovereign crisis (moral suasion). We exploit the fact that equity injections (bail-outs) by domestic governments were not directly targeted to politically connected banks to show that, upon receiving such assistance, only government-owned banks purchase domestic debt. Moral suasion is stronger in countries under stress.
File(s): File format is application/pdf http://www.federalreserve.gov/econresdata/feds/2016/files/2016060pap.pdf
Filippo De Marco
Part of Series: Finance and Economics Discussion Series
Publication Date: 2016-07-08
Pages: 46 pages