Sovereigns and Financial Intermediaries Spillovers
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Summary:
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.
Series:
Working Paper No. 2019/043
Subject:
Bank credit Bank deposits Banking Financial institutions Financial services Labor Loans Money Self-employment Sovereign bonds
English
Publication Date:
February 27, 2019
ISBN/ISSN:
9781498300704/1018-5941
Stock No:
WPIEA2019043
Pages:
33
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