Bank and sovereign debt risk connection : [draft december 2012]

Euro area data show a positive connection between sovereign and bank risk, which increases with banks’ and sovereign long run fragility. We build a macro model with banks subject to incentive problems and liquidity risk 
Euro area data show a positive connection between sovereign and bank risk, which increases with banks’ and sovereign long run fragility. We build a macro model with banks subject to incentive problems and liquidity risk (in the form of liquidity based banks’ runs) which provides a link between endogenous bank capital and macro and policy risk. Our banks also invest in risky government bonds used as capital buffer to self-insure against liquidity risk. The model can replicate the positive connection between sovereign and bank risk observed in the data. Central bank liquidity policy, through full allotment policy, is successful in stabilizing the spiraling feedback loops between bank and sovereign risk. 
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Metadaten
Author:Matthieu Darracq Pariès, Ester Faia, Diego Rodriguez Palenzuela
URN:urn:nbn:de:hebis:30:3-293779
URL:http://ssrn.com/abstract=2228494
DOI:http://dx.doi.org/10.2139/ssrn.2228494
Parent Title (German):SAFE working paper series ; No. 7
Series (Serial Number):SAFE working paper series (7)
Publisher:Goethe-Univ., House of Finance, Sustainable Architecture for Finance in Europe, SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2013
Year of first Publication:2013
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2013/04/18
Tag:capital regulation; liquidity risk; sovereign risk
Issue:draft december 2012
Pagenumber:34
HeBIS PPN:337756902
Institutes:Wirtschaftswissenschaften
House of Finance (HoF)
Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:E5 Monetary Policy, Central Banking, and the Supply of Money and Credit
G2 Financial Institutions and Services
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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