Domestic public debt and the banking system: an absorption test for Armenia

Replication code and data for the manuscript.Abstract:In 2016–2025, the Government of the Republic of Armenia directed borrowing to the domestic market. This study analyzes who absorbed this debt. The correlation of the volumes of securities held by banks with their deposits, bank lending, and the Central Bank’s repo operations is also assessed. In the Central Bank’s registry of government securities owners, bonds pledged by banks in repo transactions are recorded as investments by the Central Bank. Based on the financial statements of the Central Bank, notes to the reports of the Ministry of Finance, and monthly data on owners, these volumes were attributed to banks. The analysis shows that the share of banks in government securities decreased from 84.3% to 64.0%. The decrease was due to large-scale purchases by pension funds and non-residents. The volume of the portfolio held by all investors increased from 28.5% to 46.7% of bank deposits. The growth of banks’ investments was largely proportional to their deposits, registering a sharp increase in deposits in 2016 and 2020. In periods excluding 2020, with the ratio unchanged, the growth of deposits provided 81–95% of the growth of investments in government securities. In 2019–2025, banks pledged an average of 21–44% of their securities to the Central Bank each year. Both official sources document this range, which is accepted as an upper limit. The next increase recorded in 2023 coincides with the direct placement of bonds outside auctions. Whether bank lending moves in the opposite direction to banks’ investments in government securities depends on the way these investments are measured. Main results:- In 2016, banks held 84% of domestic government securities, and in 2025, 64%.- Pension funds held about a fifth of the government's domestic securities by 2025- In 2016 and 2020, banks' bond portfolios grew exponentially relative to deposits.- Banks pledged an average of 21–44% of their government bonds to the Central Bank.- The link between bank credit and banks' bond holdings depends on the measure used Keywords: government debt, government securities, bank deposit, repo agreement, pension fund, Armenia JEL classification: H63, G21, E44, E51, E58, P34