Bank Regulation and Sovereign Risk: A Paradox

Antonio Afonso and André Teixeira

No 10434, CESifo Working Paper Series from CESifo

Abstract: This paper investigates the impact of banking prudential regulation on sovereign risk. We show that prudential regulation reduces sovereign risk and induces governments to spend more. As a result, countries with tight prudential regulation have lower primary budget balances and accumulate more government debt over time. We find that prudential regulation reduces private debt, while paradoxically increasing government debt. We explore several explanations for this paradox. Our results suggest that prudential regulation enables governments to accumulate debt because they improve the nation’s credit rating and its borrowing conditions in sovereign bond markets.

Keywords: banking regulation; fiscal policy; macroprudential policy; sovereign debt; sovereign risk (search for similar items in EconPapers)
JEL-codes: E52 E58 E62 G28 H30 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ban and nep-mfd
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Related works:
Working Paper: Bank Regulation and Sovereign Risk: A Paradox (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10434

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