Title: EU Sovereign-Bank Network: Effects of Diversification and Capital Buffers on Sovereign Debt
Authors: Margherita Giuzio - EBS Universitaet fur Wirtschaft und Recht (Germany) [presenting]
Sandra Paterlini - European Business School Germany (Germany)
Ben Craig - Deutsch Bundesbank (Germany)
Abstract: After the European sovereign debt crisis, it has become clear that government bonds are not risk-free investments and are heterogeneous in their risk profiles. Therefore, recent policy discussions focused on the introduction of stricter capital and diversification requirements for EU government bonds holdings. We investigate the effect of these requirements on the European banking system, relying on the EBA stress-test dataset and on the Securities Holdings Statistics including sovereign exposures of the entire German banking system. Having access to such data, we point out some biases of the EBA sample that may undermine its representativeness. Furthermore, we analyse the sovereign portfolios of both EBA and German banks, by calculating their risk and diversification at the level of single monetary financial institutions and of the entire system, and discuss the implications of home-bias, i.e very concentrated positions of banks toward their home country. By requiring higher portfolio diversification, regulators may force connections and dependence between banks through common asset holdings, which represent an important channel of contagion in presence of financial distress. By using the German banking portfolios at an ISIN-level, we can then estimate the spillover risk and calculate the response of German banks to potential fire sales.