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The Invisible Hand of the Government: Moral Suasion during the European Sovereign Debt Crisis


Ongena, Steven; Popov, Alexander; van Horen, Neeltje (2019). The Invisible Hand of the Government: Moral Suasion during the European Sovereign Debt Crisis. American Economic Journal: Macroeconomics, 11(4):346-379.

Abstract

Using proprietary data on banks' monthly securities holdings, we find that during the European sovereign debt crisis, domestic banks in fiscally stressed countries were considerably more likely than foreign banks to increase their holdings of domestic sovereign bonds in months with relatively high domestic sovereign bond issuance. This effect is stronger for state-owned banks and for banks with low initial holdings of domestic sovereign bonds, and it is not fuelled by Central Bank liquidity provision. Our results point to a "moral suasion" mechanism, and they are not driven by concurrent risk-shifting, carry-trading, regulatory compliance, or shocks to investment opportunities.

Abstract

Using proprietary data on banks' monthly securities holdings, we find that during the European sovereign debt crisis, domestic banks in fiscally stressed countries were considerably more likely than foreign banks to increase their holdings of domestic sovereign bonds in months with relatively high domestic sovereign bond issuance. This effect is stronger for state-owned banks and for banks with low initial holdings of domestic sovereign bonds, and it is not fuelled by Central Bank liquidity provision. Our results point to a "moral suasion" mechanism, and they are not driven by concurrent risk-shifting, carry-trading, regulatory compliance, or shocks to investment opportunities.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:1 October 2019
Deposited On:07 Feb 2020 12:37
Last Modified:23 Feb 2020 07:00
Publisher:American Economic Association
ISSN:1945-7715
OA Status:Green
Publisher DOI:https://doi.org/10.1257/mac.20160377
Official URL:https://www.aeaweb.org/articles?id=10.1257/mac.20160377
Related URLs:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2828587 (Organisation)
Other Identification Number:merlin-id:17148

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