Details
- Identification
- Discussion Paper 218
- Publication date
- 29 January 2025
- Authors
- Peter Claeys | Bettina Bökemeier | Benjamin Owusu | Juan Equiza Goñi | Andreea Stoian | Michael Stierle | Directorate-General for Economic and Financial Affairs
Description
This paper provides an empirical analysis of the fiscal behaviour in the EU depending on home bias, i.e. the banks´ preference to hold domestic sovereign debt.
Highlights
- Concerns on fiscal sustainability and worsening balance sheet conditions of major banks triggered a doom loop between banks and sovereigns during the European Sovereign Debt Crisis (2010-2014). Institutional safeguards and monetary policy intervention have rebuffed such linkages. Nevertheless, the home bias, i.e. domestic banks holding predominantly domestic sovereign debt in their portfolios, is still high in most EU countries.
- This study suggests that under a high home bias some sovereigns can rely on domestic banks to provide additional fiscal room, especially during downturns, but this comes at the expense of rising public debt over time, and a lack of fiscal consolidation.
- The role of the financial market and the banking sector is thus crucial for sustainability of fiscal policy. Deep efficient financial markets allow governments to stabilise the economy and public debt. The increased presence of foreign banks contributes to such developments, but does not give incentives to governments to abandon fiscal consolidation. Participation in public banks does lead to a lack of debt stabilisation.
Information and identifiers
Discussion Paper 218. January 2025. Brussels. PDF. 58pp. Tab. Graph. Bibliogr. Free.
KC-BD-25-016-EN-N (online)
ISBN 978-92-68-23676-5 (online)
ISSN 2443-8022 (online)
doi:10.2765/3778099 (online)
JEL classification: E43, G21, H62, H63
Disclaimer
European Economy Discussion Papers are written by the staff of the European Commission’s Directorate-General for Economic and Financial Affairs, or by experts working in association with them, to inform discussion on economic policy and to stimulate debate. The views expressed in this document are solely those of the author(s) and do not necessarily represent the official views of the European Commission.
