Sovereign Default Risk and Banks in a Monetary Union

Harald Uhlig ()

German Economic Review, 2014, vol. 15, issue 1, 23-41

Abstract: This study seeks to understand the interplay between banks, bank regulation, sovereign default risk and central bank guarantees in a monetary union. I assume that banks can use sovereign bonds for repurchase agreements with a common central bank, and that their sovereign partially backs up any losses should the banks not be able to repurchase the bonds. I argue that regulators in risky countries have an incentive to allow their banks to hold home risky bonds and risk defaults, whereas regulators in other ‘safe’ countries will impose tighter regulation. As a result, governments in risky countries get to borrow more cheaply, effectively shifting the risk of some of the potential sovereign default losses on the common central bank.

Keywords: Eurozone crisis; sovereign default risk; bank regulation; risk shifting; common central bank; European Central Bank; ECB; repurchase operations; haircuts (search for similar items in EconPapers)
Date: 2014
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Journal Article: Sovereign Default Risk and Banks in a Monetary Union (2014)
Working Paper: Sovereign Default Risk and Banks in a Monetary Union (2013)
Working Paper: Sovereign Default Risk and Banks in a Monetary Union (2013)
Working Paper: Sovereign Default Risk and Banks in a Monetary Union (2013)
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DOI: 10.1111/geer.12039

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