The (Re)allocation of Bank Risk

Little is known about the location of bank risk, i.e., which investors in which countries hold bank-issued securities like bonds and stocks. In this paper, we analyze the (re-)distribution of bank risk across asset classes (short- and long-term debt, equity), across investor types and across geographic locations. We also differentiate bank holdings according to riskiness based on credit ratings and yield spreads. We use the Securities Holdings Statistics database for the euro area which contains information on securities holdings at the ISIN level. Our main findings are as follows. First, bank risk is held disproportionately by other banks. Second, households are disproportionally exposed to riskier bank securities. Third, about 30% of bank securities are held outside the euro area, with these percentages larger (smaller) for short term debt and equities (long term debt). Geographically, large issuers of bank risk such as France and Germany, also hold most of the bank risk, with the exception of the Netherlands, which, despite being a top 5 issuer, holds almost no bank securities. Fourth, the holding bank risk is highly concentrated domestically, with the concentration more extreme for countries such as Greece, Italy and Portugal, which hold more than 70% of their bank’s securities domestically. The domestic concentration of bank risk is (much) more severe than the domestic concentration of non-bank corporate securities and sovereign debt. Fifth, re-allocation is overall statistically significant but economically more important for bonds than for equities. Finally, we exploit the inclusion of some banks on the list of other systemically important institutions (O-SII) – which makes them subject to more stringent supervisory and regulatory requirements – as a shock to the riskiness of securities issued by those banks. Following the inclusion on the OSII list, bank stock (bond) prices decrease (increase) relative to stock (bond) prices of banks not included on the list. In terms of holdings, other banks increase their holdings of equity and decrease their holdings of bonds issued by the OSII-designated banks. Households and insurances likewise increase holdings of equity issued by the OSII-designated banks. By contrast, investment funds and financial vehicle corporations decrease holdings of equity issued by the OSII-designated banks.