Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops

Jean Tirole and Emmanuel Farhi

No 11024, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The recent unravelling of the Eurozone?s financial integration raised concerns about feedback loops between sovereign and banking insolvency, and provided an impetus for the European banking union. This paper provides a ?double-decker bailout? theory of the feedback loop that allows for both domestic bailouts of the banking system by the domestic government and sovereign debt forgiveness by international creditors or solidarity by other countries. Our theory has important implications for the re-nationalization of sovereign debt, macroprudential regulation, and the rationale for banking unions.

Keywords: Bailouts; Feedback loop; Shared supervision; Sovereign and corporate spreads; Sovereign default (search for similar items in EconPapers)
JEL-codes: F34 F36 F65 G28 H63 (search for similar items in EconPapers)
Date: 2015-12
New Economics Papers: this item is included in nep-cba, nep-eec and nep-opm
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Citations: View citations in EconPapers (16)

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Related works:
Journal Article: Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops (2018)
Working Paper: Deadly embrace: sovereign and financial balance sheets doom loops (2018)
Working Paper: Deadly Embrace - Sovereign and Financial Balance Sheets Doom Loops (2017)
Working Paper: Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops (2016)
Working Paper: Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops (2016)
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