Managing the Sovereign-Bank Nexus
56 Pages Posted: 24 Sep 2018
Date Written: September 24, 2018
This paper identifies the various channels that give rise to a “sovereign-bank nexus” whereby the financial health of banks and sovereigns is intertwined. We find that banks and sovereigns are linked by three interacting channels: banks hold large amounts of sovereign debt; banks are protected by government guarantees; and the health of banks and governments affect and is affected by economic activity. Evidence suggests that all three channels are relevant. The paper concludes with a discussion of the policy implications of these findings.
Keywords: fiscal policy, sovereign risk, financial stability, financial crisis, sovereign-bank nexus
JEL Classification: E62, F34, G01, G21
Suggested Citation: Suggested Citation