International evidence on the determinants of domestic sovereign debt bank holdings

Abstract

In this paper, we examine the determinants of bank holdings of domestic sovereign debt with a panel dataset of 295 banks in 35 countries between 2002 and 2013. The findings indicate that the structure of bank ownership (domestic, foreign, or government ownership), the quality of governance, and the level of financial development of the countries in which banks operate all determine the level of home bias. Specifically, we find that domestic banks tend to hold more domestic sovereign debt relative to their foreign counterparts. We also provide evidence that home bias is even stronger when the domestic bank is controlled by its government. Moreover, home bias increases when government bonds are more risky, home governments are less effective, and when banking systems are less financially developed. Overall, we find that banks’ home bias in holding sovereign debt is an international phenomenon that is determined by both bank- and country-specific factors.