‘Moral suasion’ and yield-seeking intensified sovereign debt crisis – ECB paper

"Moral suasion" by eurozone governments and yield-seeking by banks intensified the eurozone's sovereign debt crisis, a working paper published by the European Central Bank (ECB) argues.

In Bank exposures and sovereign stress transmission, Carlo Altavilla, Marco Pagano and Saverio Simonelli use a novel data set based on monthly information from 226 eurozone banks from 2007 to 2015. They investigate the determinants of changes in banks' sovereign exposures and their effects during and after the euro crisis.

They find that banks that were publicly owned, recently bailed out and less strongly capitalised "reacted to sovereign stress by increasing their domestic sovereign holdings more than other banks". This, they say, suggests the banks' choices were affected both by moral suasion and by yield-seeking.

These banks' exposures, the authors argue, "significantly amplified the transmission of risk from the sovereign and its impact on lending". This finding, they say, does not appear to arise "from spurious correlation or reverse causality".