Regulating the Doom Loop

86 Pages Posted: 13 Sep 2019

See all articles by Spyros Alogoskoufis

Spyros Alogoskoufis

affiliation not provided to SSRN

Sam Langfield

European Central Bank

Date Written: September, 2019

Abstract

Euro area governments have committed to break the doom loop between banks and sovereigns.But policymakers disagree on how to treat sovereign exposures in bank regulation. Our contributionis to model endogenous sovereign portfolio reallocation by banks in response toregulatory reform. Simulations highlight a tension between concentration and credit risk inportfolio reallocation. Resolving this tension requires regulatory reform to be complementedby an expansion in the portfolio opportunity set to include an area-wide low-risk asset. Byreinvesting into such an asset, banks would reduce both their concentration and credit riskexposure.

Keywords: Bank regulation, sovereign risk, systemic risk

JEL Classification: G01, G11, G21, G28

Suggested Citation

Alogoskoufis, Spyros and Langfield, Sam, Regulating the Doom Loop (September, 2019). ECB Working Paper No. 2313, Available at SSRN: https://ssrn.com/abstract=3453158

Spyros Alogoskoufis (Contact Author)

affiliation not provided to SSRN

Sam Langfield

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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