Sovereigns and Financial Intermediaries Spillovers

By Hamid R Tabarraei, Abdelaziz Rouabah, Olivier Pierrard

February 27, 2019

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Format: Chicago

Hamid R Tabarraei, Abdelaziz Rouabah, and Olivier Pierrard. Sovereigns and Financial Intermediaries Spillovers, (USA: International Monetary Fund, 2019) accessed November 12, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Bank credit, Bank deposits, Banking, Financial institutions, Financial services, Labor, Loans, Money, Self-employment, Sovereign bonds

Keywords: Balance sheet identity, Bank capital, Bank credit, Bank deposits, Banking sector, Contagion, Deposit bank, Europe, Global, Hiterbank market, Interest rate, Lending bank, Leverage ratio, Loans, Northern Europe, Self-employment, Southern Europe, Sovereign bonds, Sovereign risk, Sovereigns-banks nexus, Wholesale bank, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/043
Stock No:

WPIEA2019043
ISBN:

9781498300704
ISSN:

1018-5941

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