Sovereigns and Financial Intermediaries Spillovers

34 Pages Posted: 8 Apr 2019

See all articles by Hamid Tabarraei

Hamid Tabarraei

International Monetary Fund (IMF)

Abdelaziz Rouabah

Banque Centrale du Luxembourg

Olivier Pierrard

Banque Centrale du Luxembourg; IRES, UCL

Date Written: February 2019

Abstract

We examine the spillover effects between sovereigns and banks in a model with a heterogeneous banking system. An increase in sovereign's default risk affects financial intermediaries through two channels in this model. First, banks' funding costs might increase, inducing higher interest rates on loans and bonds and a cut back in these assets. Second, financial regulator's risk-weighted asset framework would assign higher weights to lower quality assets, implying a portfolio rebalancing and more deleveraging. While capital adequacy requirements weaken the impact of shocks emerging from the real economy, they amplify the effect of shocks on banks' balance sheets.

Keywords: Central banks, Interest rates on loans, Bank capital, Market interest rates, Bank liquidity, Sovereign risk, Contagion, Interbank market, interbank, deposit rate, leverage ratio, order condition, bank 's balance

JEL Classification: H63, F34, G15, E01, G21, E52, E62, G12

Suggested Citation

Tabarraei, Hamid and Rouabah, Abdelaziz and pierrard, olivier, Sovereigns and Financial Intermediaries Spillovers (February 2019). IMF Working Paper No. 19/43. Available at SSRN: https://ssrn.com/abstract=3367428

Hamid Tabarraei (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Abdelaziz Rouabah

Banque Centrale du Luxembourg ( email )

2, boulevard Royal
Luxembourg, L-2983
Luxembourg

Olivier Pierrard

Banque Centrale du Luxembourg ( email )

2, boulevard Royal
Luxembourg, L-2983
Luxembourg

IRES, UCL ( email )

3, Place Montesquieu
1348 Louvain-la-Neuve
Belgium

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