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What drives banks’ appetite for sovereign debt in CEE countries?
Article | Year: 2020 | Pages: 179 - 201 | Volume: 42 | Issue: 2 Received: June 1, 2019 | Accepted: November 18, 2019 | Published online: June 1, 2020
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FULL ARTICLE
FIGURES & DATA
REFERENCES
CROSSMARK POLICY
METRICS
LICENCING
PDF
Source: ECB SDW; Eurostat.
|
Category
|
Variable
|
Unit
|
Source
|
Expected effect
|
Mechanism
|
|
Dependent
variable
|
Sovereign
debt securities
|
% change
|
ECB Statistical Data Warehouse
|
|
|
|
Main
explanatory variables
|
Budget deficit
Change in public debt
|
% of GDP
|
Eurostat
|
+
|
Rise in deficit increases financing needs of the government, which leads
to higher supply of government bonds.
|
|
Yields
spreads
|
%
|
Eurostat
|
+
|
Higher yields on local government bonds make them more attractive for
banks.
|
|
Capital
adequacy ratio (CAR)
|
%
|
IMF Financial Soundness Indicators
|
+
|
Banks are motivated to hold debt securities to improve their CAR.
|
|
Private
sector loans
|
% change
|
ECB Data Warehouse
|
-
|
Rising of corporate loans indicates that banks see investment
opportunities in private sector
|
|
GDP
|
growth rate %
|
Eurostat
|
-
|
Stronger GDP growth has positive effect on demand for loans from private
sector, i.e. during expansions banks have more investment opportunities.
|
|
Control
variables
|
Exposure
|
%
|
Eurostat
|
-
|
Higher exposure to sovereign debt in previous period reduces the
absorption capacity for additional sovereign bonds in banks’ balance sheets.
|
|
|
(1)
|
(2)
|
(3)
|
(4)
|
(5)
|
(6)
|
|
Deficit
|
1.771***
|
1.771***
|
|
|
|
|
|
(0.271)
|
(0.271)
|
|
|
|
|
|
Change
in debt
|
|
|
3.300***
|
3.300***
|
|
|
|
|
|
(0.719)
|
(0.719)
|
|
|
|
Yield
|
0.0688
|
|
0.559
|
|
0.328
|
|
|
(0.838)
|
|
(0.993)
|
|
(0.991)
|
|
|
Spread
|
|
0.0688
|
|
0.559
|
|
0.328
|
|
|
(0.838)
|
|
(0.993)
|
|
(0.991)
|
|
Loans
growth
|
-0.0251**
|
-0.0251**
|
-0.0260**
|
-0.0260**
|
|
|
|
(0.0119)
|
(0.0119)
|
(0.0125)
|
(0.0125)
|
|
|
|
GDP
growth
|
|
|
|
|
-0.758**
|
-0.758**
|
|
|
|
|
|
(0.363)
|
(0.363)
|
|
CAR
(lagged)
|
0.277***
|
0.277***
|
0.175
|
0.175
|
0.226**
|
0.226**
|
|
(0.0969)
|
(0.0969)
|
(0.109)
|
(0.109)
|
(0.106)
|
(0.106)
|
|
Exposure
(lagged)
|
-1.716***
|
-1.716***
|
-1.316***
|
-1.316***
|
-1.740***
|
-1.740***
|
|
(0.324)
|
(0.324)
|
(0.354)
|
(0.354)
|
(0.394)
|
(0.394)
|
|
_cons
|
12.10
|
11.83
|
13.45
|
11.22
|
20.57**
|
21.89**
|
|
(8.382)
|
(7.903)
|
(9.146)
|
(8.599)
|
(10.44)
|
(9.876)
|
|
Country
FE
|
YES
|
YES
|
YES
|
YES
|
YES
|
YES
|
|
Time FE
|
YES
|
YES
|
YES
|
YES
|
YES
|
YES
|
|
N
|
286
|
286
|
286
|
286
|
286
|
286
|
* p < 0.1, ** p < 0.05, *** p < 0.01. Source: Authors.
|
t-Test: Two-Sample Assuming
Unequal Variances
|
|
|
Mean (%)
|
7.6
|
13.6
|
|
Variance (%)
|
0.05
|
0.20
|
|
Observations
|
103
|
311
|
|
Hypothesized Mean Difference
|
0.00
|
|
|
df
|
350
|
|
|
t Stat
|
-17.93
|
|
|
P(T<=t) two-tail
|
0.00
|
|
|
t Critical two-tail
|
1.97
|
|
|
|
(1)
|
(2)
|
(3)
|
|
Deficit
|
1.763***
|
|
|
|
(0.257)
|
|
|
|
Change
in debt
|
|
3.245***
|
|
|
|
(0.705)
|
|
|
Loans
growth
|
-0.0250**
|
-0.0259**
|
|
|
(0.0119)
|
(0.0125)
|
|
|
GDP
growth
|
|
|
-0.767**
|
|
|
|
(0.364)
|
|
CAR
(lagged)
|
0.278***
|
0.178*
|
0.217**
|
|
(0.0965)
|
(0.107)
|
(0.108)
|
|
Exposure
(lagged)
|
-1.701***
|
-1.293***
|
-1.785***
|
|
(0.316)
|
(0.353)
|
(0.403)
|
|
_cons
|
11.80
|
11.19
|
22.00**
|
|
(7.939)
|
(8.585)
|
(10.01)
|
|
Country
Fe
|
YES
|
YES
|
YES
|
|
Time FE
|
YES
|
YES
|
YES
|
|
N
|
286
|
286
|
286
|
* p < 0.1, ** p < 0.05, *** p < 0.01. Source: Authors.
|
|
(1)
|
(2)
|
(3)
|
(4)
|
(5)
|
(6)
|
|
Deficit
|
2.794***
|
2.794***
|
|
|
|
|
|
(0.651)
|
(0.651)
|
|
|
|
|
|
Change
in debt
|
|
|
2.284**
|
2.284**
|
|
|
|
|
|
(1.058)
|
(1.058)
|
|
|
|
Yield
|
1.266
|
|
0.765
|
|
0.264
|
|
|
(1.443)
|
|
(1.457)
|
|
(1.468)
|
|
|
Spread
|
|
1.266
|
|
0.765
|
|
0.264
|
|
|
(1.443)
|
|
(1.457)
|
|
(1.468)
|
|
Loans
growth
|
-0.0343**
|
-0.0343**
|
-0.0295**
|
-0.0295**
|
|
|
|
(0.0141)
|
(0.0141)
|
(0.0148)
|
(0.0148)
|
|
|
|
GDP growth
|
|
|
|
|
-0.464
|
-0.464
|
|
|
|
|
|
(0.446)
|
(0.446)
|
|
CAR
(lagged)
|
0.229**
|
0.229**
|
0.157
|
0.157
|
0.201*
|
0.201*
|
|
(0.101)
|
(0.101)
|
(0.111)
|
(0.111)
|
(0.115)
|
(0.115)
|
|
Exposure
(lagged)
|
-3.169***
|
-3.169***
|
-2.570***
|
-2.570***
|
-2.687***
|
-2.687***
|
|
(0.529)
|
(0.529)
|
(0.562)
|
(0.562)
|
(0.555)
|
(0.555)
|
|
_cons
|
24.75***
|
19.69**
|
21.06**
|
18.00**
|
25.54**
|
24.49**
|
|
(9.289)
|
(8.362)
|
(9.958)
|
(8.797)
|
(11.14)
|
(10.00)
|
|
Country
FE
|
YES
|
YES
|
YES
|
YES
|
YES
|
YES
|
|
Time FE
|
YES
|
YES
|
YES
|
YES
|
YES
|
YES
|
|
N
|
219
|
219
|
219
|
219
|
219
|
219
|
Standard errors in parentheses. * p < 0.1, ** p < 0.05, *** p < 0.01. Source: Authors.
|
|
(1)
|
(2)
|
(3)
|
(4)
|
(5)
|
(6)
|
|
Deficit
|
1.795***
|
1.795***
|
|
|
|
|
|
(0.486)
|
(0.486)
|
|
|
|
|
|
Change
in debt
|
|
|
3.849***
|
3.849***
|
|
|
|
|
|
(0.792)
|
(0.792)
|
|
|
|
Yield
|
0.786
|
|
2.172*
|
|
1.191
|
|
|
(1.430)
|
|
(1.299)
|
|
(1.480)
|
|
|
Spread
|
|
0.786
|
|
2.172*
|
|
1.191
|
|
|
(1.430)
|
|
(1.299)
|
|
(1.480)
|
|
Loans
growth
|
-0.0331**
|
-0.0331**
|
-0.0348**
|
-0.0348**
|
|
|
|
(0.0158)
|
(0.0158)
|
(0.0159)
|
(0.0159)
|
|
|
|
GDP
growth
|
|
|
|
|
-0.640
|
-0.640
|
|
|
|
|
|
(0.495)
|
(0.495)
|
|
CAR
(lagged)
|
1.908**
|
1.908**
|
0.722
|
0.722
|
1.367
|
1.367
|
|
(0.919)
|
(0.919)
|
(0.903)
|
(0.903)
|
(1.009)
|
(1.009)
|
|
Exposure
(lagged)
|
-1.811***
|
-1.811***
|
-1.154***
|
-1.154***
|
-1.612***
|
-1.612***
|
|
(0.369)
|
(0.369)
|
(0.318)
|
(0.318)
|
(0.385)
|
(0.385)
|
|
_cons
|
13.41
|
10.01
|
27.74*
|
18.34
|
25.00
|
19.84
|
|
(15.23)
|
(12.95)
|
(15.00)
|
(12.97)
|
(16.75)
|
(14.72)
|
|
Country
FE
|
YES
|
YES
|
YES
|
YES
|
YES
|
YES
|
|
Time FE
|
YES
|
YES
|
YES
|
YES
|
YES
|
YES
|
|
N
|
227
|
227
|
227
|
227
|
227
|
227
|
Standard errors in parentheses. * p < 0.1, ** p < 0.05, *** p < 0.01. Source: Authors.
Figure 1Share of sovereign debt securities in total assets (%), average 2006 to 2018 in the EU DISPLAY Figure
Figure 2Level of development and the share of sovereign debt securities in total assets (%) (average 2006 to 2018) DISPLAY Figure
Figure 3Share of debt securities in total assets in CEE 2006-2018 (%) DISPLAY Figure
Figure 4Share of domestic debt securities in total debt securities held by banks (%) DISPLAY Figure
Table 1Data description DISPLAY Table
Table 2Estimation results DISPLAY Table
Figure A1Graphical representation of variables DISPLAY Figure
Figure A2Difference in sovereign exposure between IT and non-IT countries in CEE region DISPLAY Figure
Table A2t-test for difference of two means (non-IT vs IT) DISPLAY Table
Table A3.1Estimation results (yields and spreads excluded) DISPLAY Table
Table A3.2Estimation results (Slovenia and Slovakia excluded) DISPLAY Table
Table A3.3Estimation results (Bulgaria and Croatia excluded) DISPLAY Table
* The authors want to thank the anonymous reviewers for insightful comments and suggestions.
1 Bulgaria and Croatia have each sent a letter on participation in ERM II, while Romania has prepared the strategy on euro adoption.
2 However, to get a complete picture on banks' exposure to sovereign debt one should also include data on loans to general government units. In addition, many banks are indirectly exposed to sovereign risk through assets of pension funds as banks are usually founders of pension funds.
3 Data for Lithuania, Estonia and Latvia not available.
4 ECB SDW data on sovereign debt securities held by banks for most CEE countries are available only from 2006.
5 Bechtel, Eisenschmidt and Ranaldo (  2019) show that banks swap sovereign debt securities for reserves, Pillar 2 refers to bank-specific requirements imposed by the supervisor in addition to the generally applicable Pillar 1 (minimum capital requirement).
6 Pillar 2 refers to bank-specific requirements imposed by the supervisor in addition to the generally applicable Pillar 1 (minimum capital requirement).
7 For example, the Hungarian National Bank announced a new interest swap facility in April 2014 that was designed to provide incentives to Hungarian banks to hold additional domestic public debt.
8 Data on the structure of domestic bond holdings (LCY, FX, FX-linked) are not available.
9 Due to volatility in the series we calculated four quarter moving averages.
10 We could not retrieve methodologically comparable data on capital adequacy ratios for all quarters in some countries. Thus, our models are unbalanced.
11 As main explanatory variables Dell’Ariccia et al. ( 2018) use T-bill interest rates, real GDP growth, inflation, nominal exchange rate, public debt and several indicators of the level of financial development (as they base the analysis on heterogeneous sample of countries).
12 All tests are available upon request.
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June, 2020
II/2020
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