Sovereign Default, Domestic Banks, and Financial Institutions

Nicola Gennaioli, Alberto Martin and Stefano Rossi

Journal of Finance, 2014, vol. 69, issue 2, 819-866

Abstract: type="main">

We present a model of sovereign debt in which, contrary to conventional wisdom, government defaults are costly because they destroy the balance sheets of domestic banks. In our model, better financial institutions allow banks to be more leveraged, thereby making them more vulnerable to sovereign defaults. Our predictions: government defaults should lead to declines in private credit, and these declines should be larger in countries where financial institutions are more developed and banks hold more government bonds. In these same countries, government defaults should be less likely. Using a large panel of countries, we find evidence consistent with these predictions.

Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (349)

Downloads: (external link)
http://hdl.handle.net/10.1111/jofi.12124 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Sovereign Default, Domestic Banks and Financial Institutions (2015)
Working Paper: Sovereign Default, Domestic Banks, and Financial Institutions (2012)
Working Paper: Sovereign default, domestic banks and financial institutions (2012)
Working Paper: Sovereign Default, Domestic Banks and Financial Institutions (2010)
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:bla:jfinan:v:69:y:2014:i:2:p:819-866

Ordering information: This journal article can be ordered from
http://www.afajof.org/membership/join.asp

Access Statistics for this article

More articles in Journal of Finance from American Finance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().