At the end of 2013, the share of domestic government debt held by the banking sectors of Eurozone countries was more than twice the amount held in 2007. We show that these increased bond holdings generated a crowding out of corporate lending. We find that the corporate loan supply was depressed by domestic sovereign bonds exclusively during the crisis period (2010–11). The crowding-out pattern holds across firms with different relationship banks within a given country. These findings suggest that sovereign bond holdings negatively impact private capital formation and reflect financial repression. We show that direct government ownership, as well as government influence through banks’ boards of directors, is among the channels used to influence banks.

Rating agencies produce ratings used by investors, but obtain most of their revenue from issuers, leading to a conflict of interest. We employ a unique data set on the use of non-rating services, and the associated payments, in India, to test if this conflict affects ratings quality. Agencies rate issuers that pay them for non-rating services higher (than agencies not hired for such services). Such issuers also have higher default rates. Both effects are increasing in the amount paid. These results suggest that issuers which hire agencies for non-rating services receive higher ratings despite having higher default risk.