Fiscal distress and banking performance: The role of macroprudential regulation

Harris Dellas (), Hiona Balfoussia and Dimitris Papageorgiou

No 14003, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Fiscal fragility can undermine a government’s ability to honor its bank deposit insurance pledge and induces a positive correlation between sovereign default risk and financial (bank) default risk. We show that this positive relation is reversed if bank capital requirements in fiscally weak countries are allowed to adjust optimally. The resulting higher requirements buttress the banking system and support higher output and welfare relative to the case where macroprudential policy does not vary with the degree of fiscal stress. Fiscal tenuousness also exacerbates the effects of other risk shocks. Nonetheless, the economy’s response can be mitigated if macroprudential policy is adjusted optimally. Our analysis implies that, on the basis of fiscal strength, fiscally weak countries would favor and fiscally strong countries would object to banking union.

Keywords: Fiscal distress; Bank performance; Optimal macroprudential policy; Greece; Banking union (search for similar items in EconPapers)
JEL-codes: E3 E44 G01 G21 O52 (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://cepr.org/publications/DP14003 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Fiscal distress and banking performance: the role of macroprudential regulation (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:14003

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP14003

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().