For a better user experience please update your browser or use Chrome or Firefox browser.
Utilities
Publication detail
HomeThe effect of possible EU diversification requirements on the risk of banks' sovereign bond portfolios
Publication metadata
Recent policy discussion includes the introduction of diversification requirements for sovereign bond portfolios of European banks. In this paper, we evaluate the possible effects of these constraints on risk and diversification in the sovereign bond portfolios of the major European banks. First, we capture the dependence structure of European countries' sovereign risks and identify the common factors driving European sovereign CDS spreads by means of an independent component analysis. We then analyze the risk and diversification in the sovereign bond portfolios of the largest European banks and discuss the role of \home bias", i.e., the tendency of banks to concentrate their sovereign bond holdings in their domicile country. Finally, we evaluate the effect of diversification requirements on the tail risk of sovereign bond portfolios and quantify the system-wide losses in the presence of fire-sales. Under our assumptions about how banks respond to the new requirements, demanding that banks modify their holdings to increase their portfolio diversification may mitigate fire-sale externalities, but may be ineffective in reducing portfolio risk, including tail risk.
- Published:
- Corporate author(s): European Systemic Risk Board
- Personal author(s): Paterlini, Sandra ; Giuzio, Margherita ; Craig, Ben
- Themes: Economy — Finance
- Subject: bank , bond , financial institution , financial risk , investment , public policy
|
PDF
|
|||
| ISSN 2467-0677 | ISBN 978-92-9472-076-4 | DOI 10.2849/195922 | Catalogue number DT-AD-19-003-EN-N |
- Released on EU publications website:
Document viewer
Note:
The publication cannot be displayed in the document viewer. Open web version
You may access it from: Download and languages