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Banks as Buyers of Last Resort for Government Bonds?

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  • Daniel Gros
Abstract
One of the key remaining key issues for the completion of the Banking Union is the concentrated exposure of banks in many countries to their own sovereign. A number of contributions have argued that banks should be discouraged from holding too much government debt and in particular should be discouraged from holding too much debt of their own government (Andritzky et al., 2016, ASC, 2015 and Korte & Steffan, 2014). The key counter-argument is that banks should be allowed to buy large amounts of their own sovereign because in this way they can stabilise the market in a crisis. Visco (2015) argues: … tight concentration limits could create substantive difficulties in “crisis” times. They could be particularly disruptive for banks’ ability to act as shock absorbers in the event of sovereign stress…. This argument is mistaken, however. As explained below, there are two reasons why the act of a bank buying the bonds of its own national government does not have a large positive impact on bond prices.

Suggested Citation

  • Daniel Gros, 2017. "Banks as Buyers of Last Resort for Government Bonds?," EconPol Policy Brief 4, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    • Handle: RePEc:ces:econpb:_4
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    References listed on IDEAS

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    1. Carlo Altavilla & Marco Pagano & Saverio Simonelli, 2017. "Bank Exposures and Sovereign Stress Transmission," Review of Finance, European Finance Association, vol. 21(6), pages 2103-2139.
    2. Acharya, Viral V. & Steffen, Sascha, 2015. "The “greatest” carry trade ever? Understanding eurozone bank risks," Journal of Financial Economics, Elsevier, vol. 115(2), pages 215-236.
    3. Massimiliano Affinito & Giorgio Albareto & Raffaele Santioni, 2016. "Purchases of sovereign debt securities by Italian banks during the crisis: the role of balance-sheet conditions," Questioni di Economia e Finanza (Occasional Papers) 330, Bank of Italy, Economic Research and International Relations Area.
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    1. Frey, Rainer & Weth, Mark Andreas, 2019. "Banks' holdings of risky sovereign bonds in the absence of the nexus: Yield seeking with central bank funding or de-risking?," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203537, Verein für Socialpolitik / German Economic Association.
    2. Fiordelisi, Franco & Girardone, Claudia & Minnucci, Federica & Ricci, Ornella, 2020. "On the nexus between sovereign risk and banking crises," Journal of Corporate Finance, Elsevier, vol. 65(C).
    3. Antonija Buljan & Milan Deskar-Skrbic & Mirna Dumicic, 2020. "What drives banks’ appetite for sovereign debt in CEE countries?," Public Sector Economics, Institute of Public Finance, vol. 44(2), pages 179-201.
    4. Iustina Alina Boitan & Kamilla Marchewka-Bartkowiak, 2021. "The Sovereign-Bank Nexus in the Face of the COVID-19 Pandemic Outbreak—Evidence from EU Member States," Risks, MDPI, vol. 9(5), pages 1-21, May.
    5. Arbogast, Tobias, 2020. "Who are these bond vigilantes anyway? The political economy of sovereign debt ownership in the eurozone," MPIfG Discussion Paper 20/2, Max Planck Institute for the Study of Societies.

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