Abstract
We investigate whether sovereign bond holdings of European banks are determined by a risk–return trade-off. Using data between 2011 and 2018 for 75 European banks, we confirm that banks exhibited risk-taking behavior during the sovereign debt crisis, e.g., due to moral suasion. In the period 2015–2018, however, banks’ investments in sovereign bonds are characterized by sound risk–return considerations, suggesting a lessening of the doom loop. This result is mainly driven by banks in the core European countries, as banks in the GIPS countries do not exhibit such behavior, nor do they avoid riskier bonds following the sovereign debt crisis.
Highlights
IntroductionSovereign Exposures of European Banks: It Is Not All Doom
We investigate whether or not observed changes in the composition of the sovereign bond portfolios of European banks are determined by a risk–return tradeoff
Our results indicate that GIPS banks, which were already accused of being excessively exposed to their home sovereigns, did not apply a sound risk–return trade-off in the period following the sovereign debt crisis
Summary
Sovereign Exposures of European Banks: It Is Not All Doom. Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affiliations
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