Government Default, Bonds, and Bank Lending Around the World: What do the Data Say?


We analyze holdings of government bonds by over 20,000 banks in 191 countries, and the role of these bonds in 20 sovereign defaults over 1998-2012. Relative to existing work, this dataset allows us to study – for both developed and emerging economies – not only the workings of the sovereign default-banking crisis nexus, but also how it comes into existence in the first place. Banks hold many government bonds (on average 9% of their assets), particularly in less financially-developed countries. During sovereign defaults, exposure to government bonds increases, especially for large banks. At the bank level, bondholdings during sovereign default correlate negatively with subsequent lending, and this correlation is mostly due to bonds acquired in pre-default years. These results indicate that in many countries the sovereign default-banking crisis nexus originates in normal times.