Doom Loop or Incomplete Union? Sovereign and Banking Risk

Abstract

This chapter discusses the foremost regulatory advances and policy proposals for the so-called “doom loop”, i.e. the perverse and destabilizing interconnections between sovereigns’ and banks’ liabilities. We discuss how the merits of the proposed regulatory reforms are strictly intertwined with the mechanisms of risk sharing being built up and implemented within the Banking Union, and more broadly within the Eurozone. We argue that it is very unlikely that there might be viable solutions to the regulatory treatment of Sovereign exposures without a strengthening of risk-sharing mechanisms.