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Regulating the doom loop

Spyros Alogoskoufis and Sam Langfield ()

No 2313, Working Paper Series from European Central Bank

Abstract: Euro area governments have committed to break the doom loop between banks and sovereigns.But policymakers disagree on how to treat sovereign exposures in bank regulation. Our contributionis to model endogenous sovereign portfolio reallocation by banks in response toregulatory reform. Simulations highlight a tension between concentration and credit risk inportfolio reallocation. Resolving this tension requires regulatory reform to be complementedby an expansion in the portfolio opportunity set to include an area-wide low-risk asset. Byreinvesting into such an asset, banks would reduce both their concentration and credit riskexposure. JEL Classification: G01, G11, G21, G28

Keywords: Bank regulation; sovereign risk; systemic risk (search for similar items in EconPapers)
Date: 2019-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cmp, nep-eec and nep-rmg
Note: 1905193
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Working Paper: Regulating the doom loop (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20192313

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