Bank Asset Reallocation and Sovereign Debt

Abstract

This paper examines how banks around the world have resized and reallocated their earning assets in response to the subprime and sovereign debt crises. We also focus on the interaction between sovereign debt and the asset allocation process. We find that banks have readjusted asset shares and the overall regulatory credit risk by substituting government securities for loans. Furthermore, they have been sensitive to variables of direct interest to the regulator and the supervisor, a result that is consistent with high-debt governments having exerting moral suasion on banks to favor the purchase of government securities over loans to the private sector.