Government guarantees and the two-way feedback between banking and sovereign debt crises

Agnese Leonello

No 2067, Working Paper Series from European Central Bank

Abstract: This paper studies the effects of government guarantees on the interconnection between banking and sovereign debt crises in a framework where both the banks and the government are fragile and the credibility and feasibility of the guarantees are determined endogenously. The analysis delivers some new results on the role of guarantees in the bank-sovereign nexus. First, guarantees emerge as a key channel linking banks’and sovereign stability, even in the absence of banks’holdings of sovereign bonds. Second, depending on the specific characteristics of the economy and the nature of banking crises, an increase in the size of guarantees may be beneficial for the bank-sovereign nexus, in that it enhances …financial stability without undermining sovereign solvency. JEL Classification: G01, G18, H63

Keywords: bank runs; government bond yield; sovereign default; strategic complementarity (search for similar items in EconPapers)
Date: 2017-05
New Economics Papers: this item is included in nep-ban and nep-cba
Note: 2292323
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Citations: View citations in EconPapers (41)

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Related works:
Journal Article: Government guarantees and the two-way feedback between banking and sovereign debt crises (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20172067

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