Sovereign Default and Domestic Banking

Igor Livshits

No 453, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: Several recent defaults on sovereign debt were accompanied by major banking crises in the defaulting countries. I argue that the banking crises, triggered by the defaults, were due to inadequate prudential regulations, which did not recognize the riskiness of the government debt. I use a simple model of prudential regulation to illustrate this point. I further investigate whether these “inadequate regulations†can be part of a constrained optimal arrangement which increases the cost of default and permits the government to borrow more ex-ante

Keywords: Sovereign default; banking; prudential regulation (search for similar items in EconPapers)
JEL-codes: F34 G11 (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:453

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