Finance and Economics Discussion Series (FEDS)
The Political Origin of Home Bias: the case of Europe
Filippo De Marco and Marco Macchiavelli
We show that politics is at the root of the banks-sovereign nexus that exacerbated the Eurozone crisis. First, government-owned banks or banks with politicians in the board of directors display higher home bias in sovereign debt compared to privately-owned banks throughout the 2010-2013 period. Second, only government-owned banks increased the home bias during the sovereign crisis (moral suasion). We exploit the fact that equity injections (bail-outs) by domestic governments were not directly targeted to politically connected banks to show that, upon receiving such assistance, only government-owned banks purchase domestic debt. Moral suasion is stronger in countries under stress.
Keywords: Banks' recapitalization, Banks-sovereign nexus, Board of directors, Government-owned banks, Home bias, Moral suasion
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