Politics, Banks, and Sub-Sovereign Debt: Unholy Trinity or Divine Coincidence?

72 Pages Posted: 8 May 2018

See all articles by Michael Koetter

Michael Koetter

Halle Institute for Economic Research

Alexander A. Popov

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: April 27, 2018

Abstract

We exploit election-driven turnover in State and local governments in Germany to study how banks adjust their securities portfolios in response to the loss of political connections. We find that local savings banks, which are owned by their host county and supervised by local politicians, increase significantly their holdings of home-State sovereign bonds when the local government and the State government are dominated by different political parties. Banks' holdings of other securities, like federal bonds, bonds issued by other States, or stocks, are not affected by election outcomes. We argue that banks use sub-sovereign bond purchases to gain access to politically distant government authorities.

Keywords: political connections, government-owned banks, sub-sovereign debt

JEL Classification: G21, H63, P16

Suggested Citation

Koetter, Michael and Popov, Alexander A., Politics, Banks, and Sub-Sovereign Debt: Unholy Trinity or Divine Coincidence? (April 27, 2018). ECB Working Paper No. 2146, Available at SSRN: https://ssrn.com/abstract=3170819 or http://dx.doi.org/10.2139/ssrn.3170819

Michael Koetter

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/en/about-the-iwh/people/detail/michael-koetter/

Alexander A. Popov (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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