Intertwined Sovereign and Bank Solvencies in a Model of Self-Fulfilling Crisis

Gustavo Adler

No 2012/178, IMF Working Papers from International Monetary Fund

Abstract: Large fiscal financing needs, both in advanced and emerging market economies, have often been met by borrowing heavily from domestic banks. As public debt approached sustainability limits in a number of countries, however, high bank exposure to sovereign risk created a fragile inter-dependence between fiscal and bank solvency. This paper presents a simple model of twin (sovereign and banking) crisis that stresses how this interdependence creates conditions conducive to a self-fulfilling crisis.

Keywords: WP; Banking crisis; sovereign debt crisis; twin crisis; budget constraint; crisis equilibrium; maximization problem; seniority structure; bank solvencies in a model; supply schedule; senior debt; bank exposure; Credit; Nonbank financial institutions; Domestic debt (search for similar items in EconPapers)
Pages: 29
Date: 2012-07-01
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Citations: View citations in EconPapers (7)

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