Sovereign Default Risk and Bank Balance Sheets
Pablo D'Erasmo (),
C. Bora Durdu and
Emine Boz ()
No 1045, 2013 Meeting Papers from Society for Economic Dynamics
This paper explores how banks' balance sheets and sovereign risk affect macroeconomic fluctuations jointly. The heightened sovereign risk and a potential default constrain the banks' ability to extend credit to firms. This happens through the capital requirement that limits the size of the bank loans to firms and government to a fraction of the banks' equity. An increase in non-performing loans to firms also hampers the bank balance sheets. With the joint interaction of sovereign risk and bank balance sheets in place, the paper, first, shows the bank balance sheet stresses and the government's need for funds to provide deposit insurance can trigger a sovereign default. The paper then examines how the introduction of specific risk weights for certain assets affect macroeconomic fluctuations and, more importantly, the joint determination of sovereign debt and banking crises.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:1045
Access Statistics for this paper
More papers in 2013 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().