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Public debt crisis and the banking system

10th National Competition for Economic Research Grants

International economics

Senior Researcher : Alberto M. Martin

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Research Centre or Institution : Centre de Recerca en Economía Internacional (CREI)


The objective of the project consists in investigating the relationship between sovereign defaults and the banking system. Specifically, we aim to study the way in which the holding of public bonds by the banking system helps to explain the effects of defaults on the real economy. For this, the Bankscope database was used, and an analysis was undertaken of the holding of public bonds by 10,000 banks in 170 countries, as well as the role that those bonds have had on 14 sovereign crises which occurred during the period 1998-2010. The preliminary results show that: i) during sovereign crises, the banks hold approximately 14% of their assets in public securities, ii) 87% of these bonds are acquired by the banks in normal times, especially in economically less developed countries, iii) when there is a sovereign default, an increase of 10% in public bonds in the possession of a bank is associated with a fall of 2.4% in the loans it grants. These results suggest that the holding of public bonds by the banking system is a key element in understanding the effects of sovereign debt crises.

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