Bank funding and the recent political development in Italy: What about redenomination risk?

Tholl, Johannes; Schwarzbach, Christoph; Pittalis, Sandro; Mettenheim, Hans-Jörg von

doi:10.1016/j.irle.2020.105932

Cited by 9 publications

(13 citation statements)

References 44 publications

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“…The headline results of the paper are reported in Table 2. We estimate three different permutations of equation (1). In column 1, we only include on the right-hand side High need × Domestic and High risk × Domestic , as well as bank fixed effects and interactions of country and month dummies.…”

Section: A Moral Suasion: Main Resultsmentioning

confidence: 99%

“…1 In response, banks may choose to respond to this pressure if they are locked in a long-term relationship with the government where it is implicitly understood that current favors are reciprocated in the future, or because they feel it is their "moral" or "patriotic" duty to help the government in times of fiscal stress. Furthermore, an undersubscribed 1 For example, after the undersubscribed auction for UK government bonds (gilts) on March 25, 2009, gilt prices slumped, the UK pound weakened against the US dollar and the euro, the opposition accused the government of losing control of public finances, and media commentators said the gilt failure further undermined the Prime Minister's reputation for economic competence ("Alarm as government debt auction fails," The Guardian, March 25, 2009 https://www.theguardian.com/business/2009/mar/25/uk-economic-rescue-in-crisis). Notes: Average holdings of domestic and foreign sovereign bonds, divided by total assets, for 207 banks in 11 euro area countries (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, and Spain) for the period September 2007-September 2012.…”

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confidence: 99%

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

Ongena

Popov

Horen

2019

American Economic Journal: Macroeconomics

108

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Using proprietary data on banks’ monthly securities holdings, we show 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 during months when the government needed to roll over a relatively large amount of maturing debt. This result cannot be explained by risk shifting, carry trading, or regulatory compliance. Domestic banks that received government support, are small, or with weaker balance sheets were particularly susceptible to “moral suasion,” while governance of banks played less of a role. (JEL D72, E62, G21, G28, H11, H63).

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Section: A Moral Suasion: Main Resultsmentioning

confidence: 99%

mentioning

confidence: 99%

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

Ongena

Popov

Horen

2019

American Economic Journal: Macroeconomics

108

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“…Thus, before the recent European crisis, sovereign credit risk was not a crucial factor for the determination of the government bond yields. However, after the outbreak of the crisis, investors seem to fear sovereign credit risk and probably even redenomination risk that boosted the yields of the most vulnerable European economies; this result has also been found recently by Tholl et al (2020). Furthermore, contagion effects may increase the volatility of government bond yields and push them to levels that cannot be justified by the economic fundamentals (Segoviano Basurto et al 2010;Arghyrou and Kontonikas 2012;Silvapulle et al 2016).…”

Section: Literature Reviewmentioning

confidence: 94%

The Driving Factors of EMU Government Bond Yields: The Role of Debt, Liquidity and Fiscal Councils

Pappas

Kostakis

2020

IJFS

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This study presents empirical evidence about the determinants of long-term government bond yields for 19 economies of the European Monetary Union (EMU) over the period 1995–2018 within a multivariate panel framework. The fixed effects estimators reveal that the relationship between public debt to the GDP ratio and yields is non-linear. We observe a threshold, which is determined to be at the area 90% of the ratio of public debt to GDP. Beyond that, area government borrowing costs increase as the public debt rises. Furthermore, we find evidence that a GDP decline and the downgrades of sovereign ratings increase the costs of government borrowing. In contrast, the operation of independent fiscal institutions helps to reduce government’s debt risk premium. Finally, liquidity in the Euro area plays a significant role on yields determination. The results remain robust when the dynamic instrumental variable fixed effect (FE-2SLS) and dynamic panel least square dummy variable corrected (LSDVC) estimators are employed. Empirical findings suggest important policy implications for the ongoing Covid-19 crisis for the EMU.

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“…Simultaneously, Italy’s national budget suffered due to the fact that domestic banks fell into financial distress and required financial support from the government (see Tholl et al. 2020 ).…”

Section: Interest Rate Convergence In the European Monetary Unionmentioning

confidence: 99%

Risk premia and the European government bond market: new empirical evidence and some thoughts from the perspective of the life insurance industry

et al. 2021

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We study yield spreads between government bonds in the European Monetary Union. This segment of the global fixed income market is of particular importance for insurance companies in Europe. Our empirical research strategy is inspired by Gunay (2020) who has analyzed the relationship between credit and liquidity risk in the United States using Granger causality tests. More specifically, we employ the procedure developed by Toda and Yamamoto (1995) to test for Granger causality among yield spreads in five different member countries of the European Monetary Union (namely Austria, Belgium, France, Italy and Ireland) relative to Germany. We examine interest rate data from bonds with three different maturities (5, 10 and 30 years). Given the importance of long-term bonds as asset class for European life insurers and pension funds, the empirical results from the often ignored market for government bonds with a maturity of 30 years should be of interest. With regard to long-term sovereign debt, there is no evidence for Granger causality among the time series examined here. Consequently, the risk premia required by investors to hold government bonds of one specific member country of the EMU do not help to forecast the risk premia that have to be paid by other countries. Given the structure of their liabilities, this empirical finding should be of high relevance for portfolio and risk managers in the European life insurance industry and in pension funds. With regard to the yield spreads to be observed in the market for 10-year government bonds, there seems to be no clear picture. Focusing on fixed income securities with a maturity of 5 years, there is one very interesting empirical finding. The test results reported here seem to imply that there is unidirectional Granger causality running from the yield spreads in all other four countries to Austria. Given that Austria is a comparably small country which is assumed to be in a fiscally stable position, this result could be interpreted as evidence for credit risk premia as being helpful to forecast liquidity risk premia in the market for medium-term government bonds issued by member states of the European Monetary Union.

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Bank funding and the recent political development in Italy: What about redenomination risk?

Cited by 9 publications

References 44 publications

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

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

The Driving Factors of EMU Government Bond Yields: The Role of Debt, Liquidity and Fiscal Councils

Risk premia and the European government bond market: new empirical evidence and some thoughts from the perspective of the life insurance industry

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