Flight to Where? Evidence from Bank Investments During the Financial Crisis

Abstract

This paper analyzes how banks react to the financial crisis and a deteriorating solvency and liquidity condition in their investment decisions and the composition of their financial assets. We use a novel dataset, which comprises all security investments by all German banks on a security-by-security basis between 2006 and 2011, and analyze whether and how banks use sales and purchases of these securities as the most direct and immediate way to change their overall asset structure. We find that banks substantially change their investment strategies with the beginning of the financial crisis. In particular, they shift their investments towards securities that are eligible as collateral in central bank credit operations and towards domestic securities. These patterns hold in particular for less healthy, lowly rated and large banks. Furthermore, banks with substantial exposure to troubled assets as for example Greek government bonds are particularly active in this perspective. Our results highlight the substantial changes in bank portfolios following the financial crisis, which constitute a major part of their assets, and have important implications for the current regulatory as well as policy debate on banks' investment decisions.

Changing Forces of Gravity: How the Crisis Affected International Banking

“…Third, the withdrawal from foreign countries could reflect an increasing home bias in banks' activities, as has been documented in other work analyzing the response of banks to the crisis (Giannetti and Laeven 2011, Hildebrand et al 2012, Rose and Wieladek 2011. Note that the reasons are difficult to disentangle: If withdrawal is due to increased risks and/or lower (relative) returns, it may in fact be a rational response to market conditions rather than an increased bias in investment decisions.…”

What Drives the Demand of Monetary Financial Institutions for Domestic Government Bonds?: Empirical Evidence on the Impact of Basel II and Basel III

“…The links between banks and the public sector have been highlighted in recent research but literature on determinants of banks' sovereign debt exposure in terms of volume is particularly limited (Buch et al (2013)). Hildebrand et al (2012) utilize unique micro-level data and examine the holdings of securities across all German banks. Their results suggest that banks have re-balanced their portfolios following the collapse of Lehman Brothers towards securities which are accepted by central banks as eligible collateral for their credit operations.…”

“…We examine the treatment of sovereign debt exposure within the Basel framework and measure its impact on the demand of MFI for marketable sovereign debt. Hildebrand et al (2012) and Buch et al (2013) focus on outstanding securities. This paper, in contrast, builds upon flows rather than stocks.…”

The (Unintended?) Consequences of the Largest Liquidity Injection Ever

“…Until now the literature used either the stress test data (covering only very large banks) or Bankscope data (where bond nationality is undisclosed), as in Acharya and Steffen (2015) and Gennaioli et al (2014). To our knowledge, the only studies that use security-level data sets compared to ours are Buch et al (2016) and Hildebrand et al (2012), both focused on Germany. Unlike these two papers, we focus on a peripheral country whose financial sector was severely hit by the crisis and, therefore, targeted by the ECB intervention.…”