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Sovereign Default Risk and Banks in a Monetary Union

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  • Harald Uhlig

Abstract

This paper seeks to understand the interplay between banks, bank regulation, sovereign default risk and central bank guarantees in a monetary union. I assume that banks can use sovereign bonds for repurchase agreements with a common central bank, and that their sovereign partially backs up any losses, should the banks not be able to repurchase the bonds. I argue that regulators in risky countries have an incentive to allow their banks to hold home risky bonds and risk defaults, while regulators in other “safe” countries will impose tighter regulation. As a result, governments in risky countries get to borrow more cheaply, effectively shifting the risk of some of the potential sovereign default losses on the common central bank.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19343.

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Date of creation: Aug 2013
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Handle: RePEc:nbr:nberwo:19343

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References

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  1. Carmen M. Reinhart, 2012. "A Series of Unfortunate Events: Common Sequencing Patterns in Financial Crises," NBER Working Papers 17941, National Bureau of Economic Research, Inc.
  2. Fernando Broner & Aitor Erce & Alberto Martin & Jaume Ventura, 2013. "Sovereign debt markets in turbulent times: Creditor discrimination and crowding-out effects," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1372, Department of Economics and Business, Universitat Pompeu Fabra, revised Nov 2013.
  3. Acharya, Viral V & Steffen, Sascha, 2013. "The "Greatest" Carry Trade Ever? Understanding Eurozone Bank Risks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9432, C.E.P.R. Discussion Papers.
  4. Reinhart, C. M., 2012. "The return of financial repression," Financial Stability Review, Banque de France, Banque de France, issue 16, pages 37-48, April.
  5. Viral V. Acharya & Sascha Steffen, 2013. "The “Greatest” Carry Trade Ever? Understanding Eurozone Bank Risks," NBER Working Papers 19039, National Bureau of Economic Research, Inc.
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Cited by:
  1. Beetsma, Roel & Mavromatis, Kostas, 2014. "An analysis of eurobonds," Journal of International Money and Finance, Elsevier, Elsevier, vol. 45(C), pages 91-111.
  2. Russell Cooper & Kalin Nikolov, 2013. "Government Debt and Banking Fragility: The Spreading of Strategic Uncertainty," NBER Working Papers 19278, National Bureau of Economic Research, Inc.

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