Domestic and external sectoral portfolios: Network structure and balance-sheet contagion

Abstract

Suggested Citation: Heipertz, Jonas; Rancière, Romain; Valla, Natacha (2018) : Domestic and external sectoral portfolios: Network structure and balance-sheet contagion, ECB Working Paper, No. 2215, ISBN 978-92-899-3320-9, European Central Bank (ECB), Frankfurt a. M., http://dx.Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte.Abstract This paper uses a unique comprehensive database on French security assets and liabilities to study the dynamics of domestic and external sectoral portfolios, their network structure, and their role in the propagation of shocks. We first show how the sharp deterioration of the net external portfolio position of France between 2008 and 2014 was driven by sectoral patterns such as the banking sector retrenchment and the increase in foreign liabilities of the public and corporate sectors, but was mitigated by the expansion of domestic and foreign asset portfolios of insurance companies. We also provide a network representation of the links between domestic sectors and the rest of the world, and document their evolution between 2008 and 2014. Second, we put forward and estimate a model of balance-sheet contagion through inter-sectoral security linkages. The estimation of the model shows that the financial sectors of the economy (banking, mutual fund, and insurance sector) are affected by balance-sheet contagion. JEL Codes: F30, G11, G20This paper uses a unique comprehensive database on French security assets and liabilities to study the dynamics of domestic and external sectoral portfolios, their inter-linkages, and their role in the propagation of shocks. The sectors include banking, mutual funds, insurance, corporate, households and public sector. The data covers the period 2008-2014.We first highlight specific sectoral patterns that echoed the 2008 sudden-stop: the banking sector severed its international activities; foreign liabilities of the public and corporate sectors gained prominence; by contrast, the insurance sector expanded massively its domestic and foreign asset portfolios. These patterns were behind the sharp deterioration of the net external portfolio position of France between 2008 and 2014.We then analyze the inter-linkages between the assets and liabilities of domestic sectors and those of the rest of the world, and document their evolution. Over time, the banking sector rebalanced its asset portfolios away from public sector securities into corporate securities. Meanwhile, its liabilities became increasingly held abroad. Finally, the insurance sector took u...

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