Abstract

http://ssrn.com/abstract=2228494
 
 

References (6)



 
 

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Bank and Sovereign Debt Risk Connection


Matthieu Darracq Paries


European Central Bank (ECB)

Ester Faia


Goethe University Frankfurt; Kiel Institute for the World Economy; French National Center for Scientific Research (CNRS) - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP)

Diego Rodriguez-Palenzuela


European Central Bank (ECB)

November 1, 2013

SAFE Working Paper No. 7

Abstract:     
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 moral hazard and liquidity risk (sudden deposit withdrawals): banks invest in risky government bonds as a form of capital buffer 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.

Number of Pages in PDF File: 44

Keywords: liquidity risk, sovereign risk, capital regulations

JEL Classification: E5, G3, E6

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Date posted: March 6, 2013 ; Last revised: March 11, 2014

Suggested Citation

Darracq Paries, Matthieu and Faia, Ester and Rodriguez-Palenzuela, Diego, Bank and Sovereign Debt Risk Connection (November 1, 2013). SAFE Working Paper No. 7. Available at SSRN: http://ssrn.com/abstract=2228494 or http://dx.doi.org/10.2139/ssrn.2228494

Contact Information

Matthieu Darracq Paries
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Frankfurt am Main, D-60311
Germany
+496913446631 (Phone)
+496913447604 (Fax)
Ester Faia (Contact Author)
Goethe University Frankfurt ( email )
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany
Kiel Institute for the World Economy
P.O. Box 4309
Kiel, D-24100
Germany
French National Center for Scientific Research (CNRS) - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP)
Ecole Normale Superieure
48 boulevard Jourdan
75014 Paris
France
Diego Rodriguez-Palenzuela
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Frankfurt am Main, D-60311
Germany
(49) 69-1344-6480 (Phone)
(49) 69-1344-6575 (Fax) (Fax)
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