Holdings Of Government Bonds Research Articles

On the Credit and Exchange Rate Channels of Central Bank Asset Purchases in a Monetary Union

Through the euro area crisis, financial fragmentation across jurisdictions became a prime concern for the single monetary policy. The ECB broadened the scope of its instruments and enacted a series of non-standard measures to engineer an appropriate degree of policy accommodation. The transmission of these measures through the currency union remained highly dependent on the financial structure and conditions prevailing in various regions. This paper explores the country-specific macroeconomic transmission of selected non-standard measures from the ECB using a global DSGE model with a rich financial sector: we extend the six-region multi-country model of Darracq Paries et al. (2016), introducing credit and exchange rate channels for central bank asset purchases. The portfolio rebalancing frictions are calibrated to match the sovereign yield and exchange rate responses after ECB's Asset Purchase Programme (APP) first announcement. The domestic transmission of the APP through the credit intermediation chain is significant and quite heterogeneous across the largest euro area countries. The introduction of global portfolio frictions on euro area government bond holdings by international investors opens up for a larger depreciation of the euro. The interaction between international and domestic channels affect the magnitude and the cross-country distribution of the APP impact.

Bankss Home-Bias in Government Bonds Holdings: Will the Supply of ESBies Create Its Own Demand?

The bank literature has documented theoretical and empirical evidence of a “diabolic loop” in the sovereign-bank nexus. Banks have a concentrated risk exposure in domestic government bonds. In the European banking union, this has led to a proposal to create European safe bonds, ESBies, which would facilitate geographical sovereign diversification, hence contributing to bank stability. But will a supply of ESBies create its own demand? The paper offers two new explanations for the home bias in banks’ government bond holdings: a sovereign-based rating cap on banks and the existence of a ‘bank tax’. These are complementary to the three explanations mentioned in the literature: risk shifting, a gamble for resurrection and moral suasion. Collectively, they cast doubt on a demand-led approach to developing a market for safe sovereign-bond backed securities.

The performance of European SRI funds investing in bonds and their comparison to conventional funds

ABSTRACTThis paper evaluates the performance of European SRI fixed-income funds domiciled in France and in Germany compared to characteristics-matched conventional funds. Fund performance is evaluated by means of conditional multi-factor models that allow for both time-varying risk and performance. The results show that SRI balanced funds perform similarly to conventional funds, whereas SRI bond funds significantly outperform their peers. The outperformance of SRI bond funds seems more related to their government (and not their corporate) bond holdings. Compared to conventional funds, SRI funds are significantly less exposed to bonds issued by the countries most affected by the Euro sovereign debt crisis, which is consistent with more conservative and long term-oriented investment strategies.

Financial Repression in the European Sovereign Debt Crisis*

At the end of 2013, the share of government debt held by the domestic banking sectors of Eurozone countries was more than twice the amount held in 2007. We show that increased domestic government bond holdings generated a crowding out of corporate lending. We find that loan supply was depressed by these domestic sovereign bonds only during the crisis period (2010-11). The pattern also holds across firms with different relationship banks within a given countries. These findings suggest that sovereign bond holdings negatively impact private capital formation. We show that direct government ownership, as well as government influence through banks' boards of directors, are among the channels used to influence banks.

Why Are Banks Not Recapitalized During Crises?

I develop a model where the sovereign debt capacity depends on the capitalization of domestic banks. Low-capital banks optimally tilt their government bond portfolio toward domestic securities, linking their destiny to that of the sovereign. If the sovereign risk is sufficiently high, low-capital banks reduce private lending to further increase their holdings of domestic government bonds, lowering sovereign yields and supporting the home sovereign debt capacity. The model rationalizes, in the context of the eurozone periphery, the increase in domestic government bond holdings, the reduction of bank credit supply, and the prolonged fragility of the financial sector.

Why Are Banks Not Recapitalized During Crises? A Political Economy Explanation

I develop a model where the sovereign debt capacity depends on the capitalization of domestic banks. Low-capital banks optimally tilt their government bond portfolio toward domestic securities, linking their destiny to that of the sovereign. If the sovereign risk is sufficiently high, low-capital banks reduce private lending to further increase their holdings of domestic government bonds, lowering sovereign yields and supporting the home sovereign debt capacity. The model rationalizes, in the context of the eurozone periphery, the increase in domestic government bond holdings, the reduction of bank credit supply, and the prolonged fragility of the financial sector.

Euro-Area Quantitative Easing and Portfolio Rebalancing

We use new and comprehensive data on the security holdings of euro-area investors to document facts about the ongoing quantitative easing program. The holdings of purchase-eligible government bonds have strong home bias not only for banks but also for insurance companies, pension funds, and mutual funds, especially in the vulnerable countries. In response to the program, foreign investors sold most of the purchase-eligible government bonds. Banks also sold purchase-eligible government bonds to a lesser extent, but insurance companies and pension funds bought them. Thus, quantitative easing may have reduced the duration mismatch for these institutions.

The Effect of Central Bank Liquidity Injections on Bank Credit Supply

We study the effectiveness of central bank liquidity injections in restoring bank credit supply following a wholesale funding dry-up. We combine borrower-level data from the Italian credit registry with bank security-level holdings and analyze the transmission of the European Central Bank three-year Long Term Refinancing Operation. Exploiting a regulatory change that expands eligible collateral, we show that banks more affected by the dry-up use this facility to restore their credit supply, while less affected banks use it to increase their holdings of high-yield government bonds. Unable to switch from affected banks during the dry-up, firms benefit from the intervention.

The political determinants of government bond holdings

This paper analyzes the link between political factors and sovereign bond holdings of US investors in 60 countries over the 2003–2013 period. We find that, in general, US investors hold more bonds in countries with few political constraints on the government. Moreover, US investors respond to increased uncertainty around major elections by reducing government bond holdings. These effects are particularly significant in democratic regimes and countries with sound institutions, which enable effective implementation of fiscal consolidation measures or economic reforms. In countries characterized by high current default risk or a sovereign default history, US investors show a tendency towards favoring higher political constraints as this makes sovereign default more difficult for the government. Political instability, characterized by the fluctuation in political veto players, reduces US investment in government bonds. This effect is more pronounced in countries with low sovereign solvency.

Why are Banks Not Recapitalized During Crises?

I develop a model where governments might prefer to have an undercapitalized domestic financial sector during crises. Weak banks optimally tilt their sovereign bond portfolio towards domestic securities that are positively correlated with banks’ other sources of revenues. Governments anticipate this gambling-forresurrection motive and therefore face a trade-off when setting capital regulation. Undercapitalized banks act as buyers of last resort for home public debt at the cost of crowding-out private lending. Following recapitalizations, governments may face lower debt capacity and higher sovereign yields. European stress test data support the proposed mechanism as high leverage banks increased domestic government bond holdings relative to low leverage banks during the crisis. The general equilibrium model can rationalize, in the context of the Eurozone periphery, the increased banks’ holdings of domestic public debt, the ecreasing private lending, and the prolonged undercapitalization of the banking sector.

The Distribution of Excess Liquidity in the Euro Area

Since 2008, excess liquidity – defined as the sum of holdings of central bank reserves in excess of reserve requirements and holdings of equivalent central bank deposits – has tended to accumulate in specific euro area countries and in a small, slowly changing group of credit institutions. Despite the stability of the concentration of excess liquidity in specific countries over time, the relevance of individual drivers has changed. First, risk aversion has played a much smaller role in explaining the concentration since 2013 than it did at the time of “flight-to-quality” phenomena in the period 2010-12. Second, the location of the relevant market infrastructures (i.e. central securities depositories, securities settlement systems and TARGET2 accounts) used by counterparties that sold assets to the Eurosystem has been a more important driver directing flows in the period 2015-16. In addition, the more recent concentration of excess liquidity is explained by the combination of a number of factors, such as banks following strict internal credit limits, investment incentives created by yield differences across the euro area and the “home bias” in euro area government bond holdings. Overall, the net cross-border flows of liquidity that resulted also determined TARGET2 balances. At the individual bank level, when controlling for banks’ capital, non-performing loans, credit risk and profitability, excess liquidity holdings in relation to total assets are found to be higher for smaller and better-capitalised banks, and for banking groups with liquidity centralised at the head institution. In addition, participation in Eurosystem longer-term refinancing operations and deposit inflows are associated with liquidity accumulation. Finally, new regulatory initiatives such as the liquidity coverage ratio are explained to be creating incentives to hold or not to distribute liquidity, thereby affecting its distribution.

The Impact of the Eurozone Crisis on European Banks Stocks Contagion or Interdependence?

JEL Classification: E6; F3; G2 1. Introduction The 2007-2009 crisis began by intense tensions in the financial systems of advanced economies and unraveled into a dramatic contraction in global growth. To prevent a larger collapse in economic activity, governments and central banks intervened massively in order to support aggregate demand--via automatic stabilizers and discretionary expenditures--and to bailout financial institutions. As a result, public finance experienced a marked degradation, leading to the emergence of the Eurozone sovereign debt crisis as a new phase of the global crisis. (1) According to the IMF Fiscal Monitor, the fiscal deficit in advanced countries (2) moves from 1.3% of the GDP in 2006 to 8.9% in 2009 while the public debt in percentage of the GDP climbed from 75.8 to 93.7 over the same period. The degradation in public finance has been more dramatic in the euro area, and more specifically in its peripheral countries. Thus, the average fiscal deficit in Greece, Ireland, Italy, Portugal, and Spain (GUPS-group) increased from 1.6% of the GDP in 2006 to 11.2% in 2009, while their public debt surged from 68.4% to 89.6% (with a projected peak at 130.5 percent of the GDP). Any drop in the market value of European sovereign debt has a negative impact on the balance sheets of European banks. Banks hold large amounts of government bonds to satisfy multiple purposes. First, investing in government bonds allows financial institutions to diversify their portfolio into low risk assets. The European prudential regulation has encouraged banks to hold such safe and liquid securities that may help to cushion losses on riskier assets. Second, holding government bonds is crucial for banks to access the central bank liquidity, insofar as the refinancing operations of the central bank are based on highly rated securities. Besides, interbank loans and repos rely heavily on the use of public bonds as collaterals. Therefore, when the value of sovereign bonds plummets it reduces both the market value of these assets in banks' balance sheets and banks' access to funding. These large holdings of Eurozone government bonds by European banks have led to a growing concern about possible spillovers from the sovereigns to the banks and a second round of spillovers from banks to sovereigns. Caruana and Avdjiev (2012) identify various channels of transmission from sovereign risks to the financial sector. First, they stress the impact of direct portfolio exposures. The Committee on the Global Finance System estimates that, for a sample of 21 advanced economies (3) at the end-2010, the banks' exposures to the domestic sovereign, measured as a percentage of banks' equities, have been above 30 percent in all countries except Austria, Ireland, and the United Kingdom (CGFS, 2011). On average, 85 percent of this exposure is held in the banking book. It is important to stress that the holding of government bonds is characterized by a strong home bias. Second, as sovereign bonds are used by banks as collaterals, a decrease in the quality of government debt may lead to a significant deterioration of funding conditions for financial institutions. (4). A third channel of transmission from sovereigns to banks resides in the fact that a marked increase in sovereign credit risk may trigger doubts on the ability of the governments to offer a credible guarantee to banks and / or financial supports in case of distress. In other terms a sovereign domestic debt crisis decreases the value of the explicit and implicit government guarantees that benefit banks that are considered too big or too interconnected (TBTF) to be allowed to fail. As these guarantees amount to very significant government subsidies (Schich and Lindh, 2012) their impairment may have a large negative impact on TBTF banks' balance sheets. This paper contributes to the growing literature on the European sovereign debt crisis by focusing on the impact of the successive crises on banks' equity returns over the period 2007-2013. …

Optimal Domestic (And External) Sovereign Default

Infrequent but turbulent episodes of outright sovereign default on domestic creditors are considered a “forgotten history” in macroeconomics. We propose a heterogeneous- agents model in which optimal debt and default on domestic and foreign creditors are driven by distributional incentives and endogenous default costs due to value of debt for self-insurance, liquidity, and risk-sharing. The government’s aim to redistribute resources across agents and through time in response to uninsurable shocks produces a rich dynamic feedback mechanism linking debt issuance, the distribution of government bond holdings, the default decision, and risk premia. Calibrated to Spanish data, the model is consistent with key cyclical comovements and features of debt-crisis dynamics. Debt exhibits protracted fluctuations. Defaults have a low frequency of 0.93 percent, are preceded by surging debt and spreads, and occur with relatively low external debt. Default risk limits the sustainable debt, and yet spreads are zero most of the time.

Banks and sovereign risk: A granular view

We investigate the determinants of sovereign bond holdings of German banks and the implications of such holdings for bank risk. We use granular information on all German banks and all sovereign debt exposures in the years 2005–2013. As regards the determinants of sovereign bond holdings of banks, we find that these are larger for weakly capitalized banks, banks that are active on capital markets, and for large banks. Yet, only around two thirds of all German banks hold sovereign bonds. Macroeconomic fundamentals were significant drivers of sovereign bond holdings only after the collapse of Lehman Brothers. With the outbreak of the sovereign debt crisis, German banks reallocated their portfolios toward sovereigns with lower debt ratios and bonds with lower yields. With regard to the implications for bank risk, we find that low-risk government bonds decreased the risk of German banks, especially for savings and cooperative banks. Holdings of high-risk government bonds, in turn, increased the risk of commercial banks during the sovereign debt crisis.

The Political Determinants of Government Bond Holdings

This paper analyzes the link between political factors and sovereign bond holdings of US investors in 60 countries over the 2003-2013 period. We find that, in general, US investors hold more bonds in countries with few political constraints on the government. Moreover, US investors respond to increased uncertainty around major elections by reducing government bond holdings. These effects are particularly significant in democratic regimes and countries with sound institutions, which enable effective implementation of fiscal consolidation measures or economic reforms. In countries characterized by high current default risk or a sovereign default history, US investors show a tendency towards favoring higher political constraints as this makes sovereign default more difficult for the government. Political instability, characterized by the fluctuation in political veto players, reduces US investment in government bonds. This effect is more pronounced in countries with low sovereign solvency.

Coordinating Intergenerational Redistribution and the Repayment of Public Debt

Is there a link between public debt and wealth inequality? Could government bondholders use intra-generational redistribution strategically to make the repayment of debt politically viable? Using a two-generations game-theoretic model, we identify coordination and divide-and-conquer as key factors. By coordinating their bond investments, the old generation may secure a majority favoring debt repayment. As a consequence, coordination mediates the impact of wealth inequality on public debt. Furthermore, ease of coordination offers another compelling reason why declining population growth fosters the accumulation of public debt. We test our model in a laboratory experiment and confirm the central predictions.

JLAG Perspectives: Tango in the Backyard Notes on Barack Obama’s Visit to Argentina

JLAG Perspectives:Tango in the Backyard Notes on Barack Obama’s Visit to Argentina Christin Bernhold Right after his historic visit to Cuba in March 2016, US President Barack Obama continued on to Argentina, where he met newly elected president Mauricio Macri. During his stay, the biggest Argentinian news agencies kept people informed on world-shaking questions: What particular watch was the US-president wearing (La Nación 2016)? Has there ever been such a well-dressed first lady (La Nación 2016a)? Isn’t it amazing that Obama made such a good figure putting on his tango-dancing feet (Clarín 2016)? Crucial issues concerning this presidential meeting – such as the signing of a “Trade and Investment Framework Agreement” or talks about advancing free trade and Argentina’s “ties to the international financial system” (The White House 2016a) – were hardly discussed in Argentina’s mainstream media but rather presented affirmatively, praising and acknowledging the long-awaited visit from the North.1 Beyond the superficialities of state rituals and gossip mongering, the first US presidential visit to Argentina in eleven years provided ample food for thought for critical geographers. This JLAG Perspectives commentary aims to highlight Obama’s presence at the Río de la Plata against the backdrop of present US influence on shaping economic and political landscapes in its historic “backyard”. The visit can be explained by Macri’s recent election in December 2015, which not only brought back a market-radical president to Argentina, but also one who appears to be a receptive partner for US geopolitical priorities. As Obama underscored, “the United States stands ready to work with Argentina through this historic transition” (The White House 2016b). Before Macri’s election, bilateral ties increasingly weakened under the governments led by Néstor Kirchner and Cristina Fernández de Kirchner. Even if neither of them fully scrapped Argentine neoliberal accumulation, both attempted to limit the US role in shaping public policy and fostered regional integration instead. It was during Néstor Kirchner’s presidency that then US president George W. Bush failed to talk several Latin American leaders into the Free Trade Area of the Americas, known by the Spanish acronym ALCA. Bush’s stay at the Summit of the Americas taking place in Argentina in 2005 was over soon after Kirchner called the Washington Consensus a fiasco and Venezuela’s president Hugo Chavez proclaimed, “ALCA, ALCA al carajo” (ALCA go to hell) (La Nación 2016b). Later, Cristina Kirchner refused to abolish retenciones (taxes on exports of primary goods), expanded social programs, moved to counter the monopolization of the media, and pushed investigations into the Argentine civil-military dictatorship [End Page 147] (1976-1983). She also opposed US hedge funds in a high-profile debt dispute: during the state bankruptcy in 2001, 93 percent of the government bondholders had agreed on debt relief. So-called vulture funds bought the remaining 7 percent of the virtually worthless bonds and demanded a high multiple of the price they originally paid. In June 2014, US Judge Thomas Griesa upheld the suit. Nevertheless, Kirchner refused to pay, criticizing the exploitation of her country. Anyhow, enthusiasm for “Kirchnerism” had faded: even if many Argentinians truly have experienced an improvement of their social situation, stagnating social development coupled with charges of corruption helped the political right organize a comeback. Before its ascension to power in 2015, Macri’s coalition Cambiemos (Let’s change), announced an envisaged rapprochement with the USA. Together with his economics minister, Alfonso Prat-Gay, an ex-JP Morgan Banker, Macri pushed a new bill through the Chamber of Deputies that allows billion dollar payments to US hedge funds and enables the new round of indebtedness these payments made necessary. During his visit, Obama praised this “constructive approach that President Macri has taken” (The White House 2016b). A Bloomberg news article entitled “Wall Street Is in Charge in Argentina (Again)” was not meant ironically (Millan 2016). To the delight of agribusiness multinationals, the new government immediately removed retenciones on agricultural exports (those on soy have been lowered). It lifted currency controls, reduced the welfare state, re-enabled media monopolization, and announced wage growth beyond the inflation rate. Meanwhile, its...

Preferential Regulatory Treatment and Bankss Demand for Government Bonds

Government bonds receive preferential treatment in financial regulation. The purpose of this paper is to analyze the impact of this preferential treatment on banks’ demand for government bonds. Using unique transaction-level data, our analysis suggests that preferential treatment in liquidity and capital regulation increases banks’ demand for government bonds beyond their own risk appetite. Liquidity and capital regulation also seem to incentivize banks to substitute other bonds with government bonds. On top of that, we find evidence that regulation leads to a longer-term increase in government bond holdings. Finally, our results suggest that higher government bond holdings are associated with more lending and lower profits during normal times but not during stress.

Emerging market local currency bond yields and foreign holdings – A fortune or misfortune?

The paper shows that foreign holdings of local currency government bonds in emerging market countries (EMs) have reduced bond yields but have somewhat increased yield volatility. Econometric analyses conducted from a sample of 13 EMs demonstrate that these results are robust and causal. We use an identification strategy exploiting the geography-based measure of EMs financial remoteness vis-à-vis major offshore financial centers as an instrumental variable for the foreign holdings variable. The results also show that, in countries with weak fiscal positions, foreign holdings are greatly associated with increased yield level. A case study using Poland data elaborates on the cross country findings.

Transforming Central Bank Liabilities into Government Debt: The Case of China

AbstractWhere policy has substantially increased central bank assets, the corresponding liabilities present an opportunity to increase the breadth, depth and liquidity of the government bond market. In China's case, transformed illiquid central bank liabilities could double or triple the stock of government bonds. Central bank liabilities can be transformed into government bonds either through the government's purchase of foreign exchange reserves held by the central bank or by the government overfunding its borrowing requirement and depositing the proceeds in the central bank. The overfunding approach is preferred if, for financial stability reasons, it is judged prudent to leave the central bank with sufficient resources to serve itself as lender of last resort in foreign currency to the banking system. In the case of China, public debt consolidation could also contribute to further liberalizing the Chinese banking system, wider international use of the renminbi and more balanced holdings of key currency government bonds.