Determinants of government bond holdings by commercial banks in developing countries before COVID-19: the case of Cape Verde

Abstract This study identifies the factors that determine banks' investment in government bonds in a small developing country such as Cape Verde. The sample covers the period before COVID-19. A fixed-effects estimators were applied. The results show that cash and reserves at the central bank, bank size, return on equity, and changes in domestic public debt are determinants of the percentage of government bonds in banks' assets. The study suggests that banks are persistent over time in investing in government bonds beyond regulatory requirements and, this persistence is ensured by maintaining high liquidity, which is an incentive for these investments.