Business Irish

Saturday 24 February 2018

Governments leaned on banks to buy bonds

The European Central Bank
The European Central Bank

Stressed Eurozone governments persuaded domestic banks to buy their bonds when the debt crisis was at its height, using “moral suasion” to counter the rising risks, research published by the ECB showed yesterday.

Regulators and supervisors are trying to break a ‘doom loop’ of debt interdependence between lenders and their governments, in part by making it less attractive for banks to hold sovereign bonds.

Domestic banks have traditionally been buyers of a significant proportion of the debt issued by governments in the currency bloc.

But the study of the purchasing patterns of 60 banks in Greece, Ireland, Italy, Portugal and Spain between 2010-2012 showed that, in months when their governments needed to issue or roll over a large amount of debt, they were more likely than usual to buy than foreign peers.

“Our estimates thus strongly and consistently suggest that collusion between banks and sovereigns (or ‘moral suasion’) took place during the sovereign debt crisis,” authors Steven Ongena, Alexander Popov and Neeltje Van Horen wrote in the study.

They said the effect was strongest for state-owned banks and, in particular, those that had low holdings of sovereign bonds to start with – indicating governments strategically picked the banks they chose to influence. The authors say such purchases can have a beneficial impact in helping stabilise markets at a time of stress, while also reinforcing a “deadly embrace” that heightens risks to the financial system.

Interdependence between governments and domestic banks has diminished since the ECB became a major bond buyer. (Reuters)

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