TY  - UNPD
A1  - Faia, Ester
T1  - Sovereign risk, bank funding and investors’ pessimism
T2  - Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 542
N2  - Data show that sovereign risk reduces liquidity, increases funding cost and risk of banks highly exposed to it. I build a model that rationalizes this fact. Banks act as delegated monitors and invest in risky projects and in risky sovereign bonds. As investors hear rumors of increased sovereign risk, they run the bank (via global games). Banks could rollover liquidity in repo market using government bonds as collateral, but as sovereign risk raises collateral values shrink. Overall banks’ liquidity falls (its cost increases) and so does banks’ credit. In this context noisy news (announcements with signal extraction) of consolidation policies are recessionary in the short run, as they contribute to investors and banks pessimism, and mildly expansionary in the medium run. The banks liquidity channel plays a major role in the fiscal transmission.
T3  - CFS working paper series - 542 
KW  - liquidity risk
KW  - sovereign risk
KW  - banks’ funding costs
Y1  - 2016
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/41681
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30:3-416815
UR  - http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2849031
IS  - September 30, 2016
PB  - Center for Financial Studies
CY  - Frankfurt, M.
ER  -