Sovereigns and Financial Intermediaries Spillovers

Hamid Tabarraei, Abdelaziz Rouabah and Olivier Pierrard

No 2019/043, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; interest rate; deposit bank; Sovereign risk; Contagion; hiterbank market; lending bank; wholesale bank; leverage ratio; sovereigns-banks nexus; balance sheet identity; bank capital; banking sector; Bank credit; Sovereign bonds; Self-employment; Loans; Bank deposits; Northern Europe; Southern Europe; Europe; Global (search for similar items in EconPapers)
Pages: 33
Date: 2019-02-27
New Economics Papers: this item is included in nep-ban and nep-dge
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