The Sovereign-Bank Diabolic Loop and ESBies

Markus Brunnermeier, Luis Garicano, Philip Lane, Marco Pagano, Ricardo Reis, Tano Santos, David Thesmar, Stijn Van Nieuwerburgh and Dimitri Vayanos

No 21993, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.

JEL-codes: E58 F34 G01 G15 G21 G23 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (24)

Published as Markus K. Brunnermeier & Luis Garicano & Philip R. Lane & Marco Pagano & Ricardo Reis & Tano Santos & David Thesmar & Stijn Van Nieuwerburgh & Dimitri Vayanos, 2016. "The Sovereign-Bank Diabolic Loop and ESBies," American Economic Review, American Economic Association, vol. 106(5), pages 508-12, May.

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Related works:
Journal Article: The Sovereign-Bank Diabolic Loop and ESBies (2016)
Working Paper: The sovereign-bank diabolic loop and ESBies (2016)
Working Paper: The Sovereign-Bank Diabolic Loop and ESBies (2016)
Working Paper: The Sovereign-Bank Diabolic Loop and ESBies (2016)
Working Paper: The Sovereign-Bank Diabolic Loop and Esbies (2016)
Working Paper: The sovereign-bank diabolic loop and ESBies (2016)
Working Paper: The sovereign-bank diabolic loop and ESBies (2016)
Working Paper: The sovereign-bank diabolic loop and ESBies (2016)
Working Paper: The Sovereign-Bank Diabolic Loop and ESBies (2016)
Working Paper: The Sovereign-Bank Diabolic Loop and Esbies (2016)
Working Paper: The Sovereign-Bank Diabolic Loop and ESBies (2016)
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