Preferential Regulatory Treatment and Banks' Demand for Government Bonds

Clemens Bonner

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Abstract

The purpose of this paper is to analyze the impact of preferential regulatory treatment on banks’ demand for government bonds. Using unique transaction-level data, our analysis suggests that preferential treatment in microprudential liquidity and capital regulation significantly increases banks’ demand for government bonds. Liquidity and capital regulation also seem to incentivize banks to substitute other bonds with government bonds. We also find evidence that this "regulatory effect" leads banks to reduce lending to the real economy.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages48
Volume2015-056
Publication statusPublished - 3 Dec 2015

Publication series

NameCentER Discussion Paper
Volume2015-056

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Keywords

  • government bonds
  • financial markets
  • regulation
  • liquidity
  • capital allocation

Cite this

Bonner, C. (2015). Preferential Regulatory Treatment and Banks' Demand for Government Bonds. (CentER Discussion Paper; Vol. 2015-056). Tilburg: CentER, Center for Economic Research.