An exposure of commercial banks in the terms of an impact of government bondholding with the context of its risks and implications

Abstract

The European government bonds are considered a safe investment among the asset managers and investors. For instance, commercial banks as portfolio holders use them to achieve additional yields, and to store liquidity in them or to refinance via them, when government bonds serve as a collateral in the refinancing operations. The financial and debt crisis changed the view of the European government bonds as the safest form of investment. Considering this economic development, some advanced European countries failed to meet their liabilities resulting from issued bonds towards their holders. In this analysis, a focus is laid on the contemporary issues related to government bondholdings by commercial banks in view of the current financial crisis conditions. Based on the European Central Bank data, we analyse the relationship between the credit rating of the bond and the ten-year interest rates of government bonds by means of the panel regression on the bondholding of commercial banks in the period from 2010 to 2014. Our regression suggests that there is a statistically significant correlation between these independent variables and bondholding. A preferential treatment of the government bonds as the risk-free assets might lead to an overexposure of the commercial banks to the domestic bonds. As an implication, we summaries the proposals for treating overexposure of commercial banks to national debts in the recent time.