Giorgia Simion and Ugo Rigoni
Review of Finance, Volume 29, Issue 3, May 2025, Pages 819–850, https://doi.org/10.1093/rof/rfaf014
As retail bond issuance can serve as an important funding source for banks during periods of market stress, it raises concerns about potential conflicts of interest between banks and their clients. In this paper, we investigate how investor demand-side and bank supply-side characteristics relate to households’ holdings of bonds issued by their own bank.
European regulations require unsecured bondholders to absorb losses before public funds can be used in case of bank resolution. Despite this risk, retail bonds are an attractive funding channel for banks, offering greater stability than deposits, which are vulnerable to bank runs during crises. Notably, during the 2007–2009 financial crisis and the subsequent sovereign debt crisis, retail bonds provided a low-cost funding source, as their yields did not fully reflect issuer risk and market liquidity.
Using unique data from eight Italian cooperative credit banks (CCBs) between 2011 and 2015, we document that investors allocate a strikingly high share of their total portfolio – approximately 40% – to own bank bonds. Households with a higher concentration of own bank bonds tend to have a lower education level, a shorter investment horizon, and less wealth. While portfolio theory suggests that investor and investment characteristics are the primary factors shaping investment choices, we find that bank and branch-level characteristics also matter. Specifically, own bank bond concentration is associated with higher bank funding needs, lower profitability, and greater local market share, once investor and investment characteristics are accounted for.
We further explore the performance implications of this behavior, showing that a buy-and-hold portfolio strategy with government bonds would have yielded higher returns. This evidence suggests that heavily investing in own bank bonds was likely a poor investment strategy.
Our study contributes to the literature on diversification and local bias by introducing a previously unexplored concept— the “own bank bias”. Additionally, we relate our findings to the literature on conflicts of interest. To our knowledge, we are the first to examine how time-varying characteristics of banks and their branches influence households’ portfolio choices. Unlike prior studies that either confirm or contest the existence of conflicts of interest, our results shed light on the importance of time-varying supply-side factors.