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Domestic Banks As Lightning Rods? Home Bias and Information during the Eurozone Crisis

Saka, O. ORCID: 0000-0002-1822-1309 (2020). Domestic Banks As Lightning Rods? Home Bias and Information during the Eurozone Crisis. Journal of Money, Credit and Banking, 52(S1), pp. 273-305. doi: 10.1111/jmcb.12744

Abstract

European banks have been criticized for holding excessive domestic government debt during the recent Eurozone crisis, which may have intensified the diabolic loop between sovereign and bank credit risks. By using a novel bank-level data set covering the entire timeline of the Eurozone crisis, I first reconfirm that the crisis led to the reallocation of sovereign debt from foreign to domestic banks. In contrast to the recent literature focusing only on sovereign debt, I show that the banks' private-sector exposures were (at least) equally affected by the rise in home bias. Consistent with this pattern, I propose a new debt reallocation channel based on informational frictions and show that the informationally closer foreign banks increase their relative exposures when the sovereign risk rises. The effect of informational closeness is economically meaningful and robust to the use of different information measures and controls for alternative channels of sovereign debt reallocation.

Publication Type: Article
Additional Information: © 2020 The Authors. Journal of Money, Credit and Banking published by Wiley Periodicals LLC on behalf of Ohio State University This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.
Publisher Keywords: home bias, information asymmetries, Eurozone crisis, sovereign debt
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
J Political Science > JN Political institutions (Europe)
Departments: School of Arts & Social Sciences > Economics
Date available in CRO: 22 Sep 2021 14:07
Date deposited: 22 September 2021
Date of acceptance: 12 December 2019
Date of first online publication: 6 November 2020
URI: https://openaccess.city.ac.uk/id/eprint/26782
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