- Author
- Pablo D'Erasmo, Igor Livshits and Koen Schoors (UGent)
- Organization
- Abstract
- Banking regulation routinely designates domestic government debt as safe, even when this debt is risky. We show, in a parsimonious model, that this failure to recognize the riskiness of government debt induces domestic banks to "gamble"with depositors' funds by purchasing risky government bonds and assets correlated with them. Sovereign defaults then result in banking crises; however, by permitting banks to gamble, the regulator lowers the government's borrowing costs ex -ante. Thus, the government has an incentive to ignore the riskiness of the sovereign bonds. We derive a set of testable implications and present supporting empirical evidence from sovereign debt crises in Russia, Argentina, and the Eurozone.
- Keywords
- Banking, Sovereign default, Prudential regulation, Financial crisis
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Citation
Please use this url to cite or link to this publication: http://hdl.handle.net/1854/LU-01J159D2VJFJH45BHJDP16RCWN
- MLA
- D’Erasmo, Pablo, et al. “Banking Regulation with Risk of Sovereign Default.” JOURNAL OF INTERNATIONAL ECONOMICS, vol. 150, 2024, doi:10.1016/j.jinteco.2024.103917.
- APA
- D’Erasmo, P., Livshits, I., & Schoors, K. (2024). Banking regulation with risk of sovereign default. JOURNAL OF INTERNATIONAL ECONOMICS, 150. https://doi.org/10.1016/j.jinteco.2024.103917
- Chicago author-date
- D’Erasmo, Pablo, Igor Livshits, and Koen Schoors. 2024. “Banking Regulation with Risk of Sovereign Default.” JOURNAL OF INTERNATIONAL ECONOMICS 150. https://doi.org/10.1016/j.jinteco.2024.103917.
- Chicago author-date (all authors)
- D’Erasmo, Pablo, Igor Livshits, and Koen Schoors. 2024. “Banking Regulation with Risk of Sovereign Default.” JOURNAL OF INTERNATIONAL ECONOMICS 150. doi:10.1016/j.jinteco.2024.103917.
- Vancouver
- 1.D’Erasmo P, Livshits I, Schoors K. Banking regulation with risk of sovereign default. JOURNAL OF INTERNATIONAL ECONOMICS. 2024;150.
- IEEE
- [1]P. D’Erasmo, I. Livshits, and K. Schoors, “Banking regulation with risk of sovereign default,” JOURNAL OF INTERNATIONAL ECONOMICS, vol. 150, 2024.
@article{01J159D2VJFJH45BHJDP16RCWN,
abstract = {{Banking regulation routinely designates domestic government debt as safe, even when this debt is risky. We show, in a parsimonious model, that this failure to recognize the riskiness of government debt induces domestic banks to "gamble"with depositors' funds by purchasing risky government bonds and assets correlated with them. Sovereign defaults then result in banking crises; however, by permitting banks to gamble, the regulator lowers the government's borrowing costs ex -ante. Thus, the government has an incentive to ignore the riskiness of the sovereign bonds. We derive a set of testable implications and present supporting empirical evidence from sovereign debt crises in Russia, Argentina, and the Eurozone.}},
articleno = {{103917}},
author = {{D'Erasmo, Pablo and Livshits, Igor and Schoors, Koen}},
issn = {{0022-1996}},
journal = {{JOURNAL OF INTERNATIONAL ECONOMICS}},
keywords = {{Banking,Sovereign default,Prudential regulation,Financial crisis}},
language = {{eng}},
pages = {{21}},
title = {{Banking regulation with risk of sovereign default}},
url = {{http://doi.org/10.1016/j.jinteco.2024.103917}},
volume = {{150}},
year = {{2024}},
}
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