Understanding bank demand for sovereign debt and its systemic risk implications: The Kenyan experience

This study investigates the demand for government securities by Kenyan banks using annual data from 2005 to 2022. Employing a fixed-effects panel regression model, the research examines the factors influencing banks' sovereign debt holdings and their implications for systemic risk. Key findings reveal that fiscal deficits, attractive bond yields, and capital adequacy requirements significantly drive banks' appetite for government securities. Over time, the similarity in sovereign holdings across banks has increased, raising concerns about systemic risk due to potential correlated exposure to sovereign debt shocks. The study also identifies a negative relationship between private sector lending and sovereign debt holdings, highlighting potential "crowding out" effects. These insights are critical for informing regulatory policies aimed at mitigating systemic risks in the Kenyan banking sector