Sovereign Bond Holdings, Bank Risk‐Taking, and Macroeconomic Shocks: Evidence From Vietnam

Abstract

This study examines whether the purchase of sovereign bonds leads to decreased bank risk and how this impact changes in worse macroeconomic conditions. For a broad picture of macroeconomic shocks, we concentrate on the dimensions of uncertainty (the cross‐sectional dispersion of shocks to bank‐level characteristics) and crises (the global financial crisis and the COVID‐19 contagion). An empirical examination of the Vietnamese banking sector between 2007 and 2021 shows that banks purchasing securities issued by the domestic government tend to have lower risk. However, this impact is relatively weak on average, varying with the measures of bank risk. Through subsample tests, we document that the impact of sovereign bond holdings on bank risk is shaped by banks with high‐risk‐weighted assets and low diversification. Further results designate that sovereign bond holdings are necessary for banks as such activities help significantly lower their risk exposure in periods of crisis and uncertainty. This finding remains robust to different measures of bank risk.