Regulating the doom loop

Spyros Alogoskoufis and Sam Langfield

No 74, ESRB Working Paper Series from European Systemic Risk Board

Abstract: Euro area governments have committed to break the doom loop between bank risk and sovereign risk. But policymakers have not reached consensus on whether and how to reform the regulatory treatment of banks’ sovereign exposures. To inform policy discussions, this paper simulates portfolio reallocations by euro area banks under scenarios for regulatory reform. Simulations highlight a tension in regulatory design between concentration and credit risk. An area-wide low-risk asset—created by pooling and tranching cross-border portfolios of government debt securities— would resolve this tension by expanding the portfolio opportunity set. Banks could therefore reinvest into an asset that has both low concentration and low credit risk. JEL Classification: G01, G11, G21, G28

Keywords: bank regulation; sovereign risk; systemic risk (search for similar items in EconPapers)
Date: 2018-05
New Economics Papers: this item is included in nep-ban, nep-cmp, nep-eec and nep-rmg
Note: 1905193
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://www.esrb.europa.eu//pub/pdf/wp/esrb.wp74.en.pdf (application/pdf)

Related works:
Journal Article: Regulating the Doom Loop (2020)
Working Paper: Regulating the doom loop (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:srk:srkwps:201874

Access Statistics for this paper

More papers in ESRB Working Paper Series from European Systemic Risk Board 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().