The Invisible Hand of the Government: Moral Suasion during the European Sovereign Debt Crisis

Abstract

Using proprietary data on banks’ monthly securities holdings, we show that during the European sovereign debt crisis, domestic banks in fiscally stressed countries were considerably more likely than foreign banks to increase their holdings of domestic sovereign bonds during months when the government needed to roll over a relatively large amount of maturing debt. This result cannot be explained by risk shifting, carry trading, or regulatory compliance. Domestic banks that received government support, are small, or with weaker balance sheets were particularly susceptible to “moral suasion,” while governance of banks played less of a role. (JEL D72, E62, G21, G28, H11, H63).

International investment positions revisited: Investor heterogeneity and individual security characteristics

“…Finally, we find that banks and to lesser extent ICPFs invest relatively more in bonds issued by sovereigns, while investment funds and households reduce their holdings of bonds issued by sovereigns, ceteris paribus, which may indicate a link between banks and sovereigns (e.g., Horváth, Huizinga, & Ioannidou, ; Ongena, Popov, & Van Horen, ). We find that banks tend to hold about 57% more if a bond was issued by a foreign sovereign relative to other investors, which are the baseline group.…”

Cross‐Border Auction Cycle Effects of Sovereign Bond Issuance in the Euro Area

“…Interestingly, evidence provided by Ongena, Popov, and van Horen () suggests that banks’ increased exposure to domestic sovereign debt during the euro area sovereign debt crisis is at least partly due to “moral suasion” by fiscally stressed sovereigns putting pressure on domestic banks to take more of their debt on their balance sheets.…”

Regulatory Soft Interventions in the Chinese Market: Compliance Effects and Impact on Option Market Efficiency

“…However, soft intervention in China is stronger and more efficient under the state-controlled financial system. Another notable difference is that while previous works (Hoshi, Scharfstein and Singleton, 1993;Rhodes and Yoshino, 1999;Ongena, Popov and Van Horen, 2016) mainly documents moral suasion and window guidance in the banking industry, the CSRC and Chinese government effectively soft-intervene in equity and derivatives markets. The soft intervention in China is a much stronger tool than moral suasion and window guidance in other countries because state-controlled firms have a dominant market position and these firms tend to comply with the will of the state.…”