Home bias in banks' sovereign debt holdings and fiscal sustainability

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dc.contributor.authorCLAEYS, Peter Gunther Antoon
dc.contributor.authorBÖKEMEIER, Bettina
dc.contributor.authorOWUSU, Benjamin
dc.contributor.authorEQUIZA GOÑI, Juan
dc.contributor.authorSTOIAN, Andreea
dc.date.accessioned2025-06-16T15:25:13Z
dc.date.available2025-06-16T15:25:13Z
dc.date.issued2025
dc.descriptionThis paper is part of the Banking Supervision Policy Working Paper Series in the context of the SSM-EUI partnership on SSM Banking Supervision Learning Services.
dc.description.abstractConcerns about fiscal sustainability and worsening balance sheet conditions of major banks triggered a doom loop between banks and sovereigns during the European sovereign debt crisis. Despite closer financial integration and additional institutional safeguards, the home bias, i.e. bank holdings of domestic sovereign debt, is still high in most EU countries. Sovereign debt accumulation by the domestic financial sector may happen under the pressure of moral suasion, but the impact on consolidation by the sovereign is ambiguous. We therefore examine the non-linear effects of home bias on fiscal sustainability using panel smooth transition regression models on a fiscal rule for EU countries. We find that debt consolidation is a concern for governments, even when the home bias is high. Potential financial instability constrains governments’ deficit bias, without endangering economic stabilisation, at least in countries with developed financial markets. Countries with shallow markets face constraints in stabilisation of economic shocks and must run procyclical policies to avoid debt problems. Foreign entry in the banking system disciplines sovereigns, yet state-owned banks soften budget constraints.
dc.format.mimetypeapplication/pdf
dc.identifier.issn1028-3625
dc.identifier.urihttps://hdl.handle.net/1814/92824
dc.language.isoen
dc.orcid.putcode1814/80909:186074543
dc.publisherEuropean University Institute
dc.relation.ispartofseriesEUI
dc.relation.ispartofseriesRSC
dc.relation.ispartofseriesWorking Paper
dc.relation.ispartofseries2025/21
dc.relation.ispartofseriesFlorence School of Banking and Finance
dc.relation.ispartofseriesBanking Supervision Policy
dc.rightsinfo:eu-repo/semantics/openAccess
dc.rights.licenseAttribution 4.0 Internationalen
dc.rights.urihttp://creativecommons.org/licenses/by/4.0/
dc.subjectFiscal policy
dc.subjectSovereign debt
dc.subjectDebt sustainability
dc.subjectHome bias
dc.subjectFinancial development
dc.subjectE43
dc.subjectG21
dc.subjectH62
dc.subjectH63
dc.titleHome bias in banks' sovereign debt holdings and fiscal sustainability
dc.typeWorking Paper
dspace.entity.typePublication
person.identifier.orcid0000-0003-2263-4250
person.identifier.other28634
relation.isAuthorOfPublication7358da7c-f000-42b1-ad84-b920fdbe08d6
relation.isAuthorOfPublication.latestForDiscovery7358da7c-f000-42b1-ad84-b920fdbe08d6
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