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Hazardous tango: sovereign-bank interdependence and financial stability in the euro area

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  • Merler, S.
  • Pisani-Ferry, J.

Abstract

The strong interdependence between banking and sovereign crisis has emerged as a salient feature of euro area crisis. This interdependence, for sure, is not a specific feature of the euro area. But as pointed out by several authors the vicious cycle seems to be extremely strong in the euro area. The reason why euro area banks and sovereigns seem to be indissolubly tied together is twofold. On one hand, in the absence of a supranational banking resolution framework, member states keep individual responsibility for the rescue of their national banking system. Given the size of the banking systems across the euro area, this implies that the fiscal consequences of rescuing banks are potentially very large and explains how stress in the banking system can spill over to sovereigns. On the other hand, domestic banks hold on their balance sheets a considerable share of the debt issued by their domestic government. Any doubt about sovereign solvency immediately therefore affects domestic banks. This two-way bank-sovereign interdependence constitutes one of the specific features of the euro area that renders it especially fragile. In spite of this demonstrated weakness there has been surprisingly little policy action to remedy this state of affairs. Proposals for giving the European Union or the euro area responsibility for rescuing banks, or at least backstopping national authorities, have been consistently rejected.

Suggested Citation

  • Merler, S. & Pisani-Ferry, J., 2012. "Hazardous tango: sovereign-bank interdependence and financial stability in the euro area," Financial Stability Review, Banque de France, issue 16, pages 201-210, April.
  • Handle: RePEc:bfr:fisrev:2011:16:19
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    References listed on IDEAS

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    Cited by:

    1. Udaibir S. Das & Maria A. Oliva & Takahiro Tsuda, 2012. "Sovereign Risk: A Macro-Financial Perspective," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 8(3), pages 367-392, August.
    2. Gustav A. Horn & Fabian Lindner & Silke Tober & Andrew Watt, 2012. "Quo vadis Krise? Zwischenbilanz und Konzept für einen stabilen Euroraum," IMK Report 75-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    3. Aloisio Araujo & Marcia Leon & Rafael Santos, 2017. "Bargained haircuts and debt policy implications," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 635-656.
    4. Brutti, Filippo & Sauré, Philip, 2015. "Transmission of sovereign risk in the Euro crisis," Journal of International Economics, Elsevier, vol. 97(2), pages 231-248.
    5. Gustav A. Horn & Fabian Lindner & Silke Tober & Andrew Watt, 2012. "Where now for the euro area crisis? Interim assessment and a model for a stable euro area," IMK Report 75e-2012, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    6. Jack Bekooij & Jon Frost & Remco van der Molen & Krzysztof Muzalewski, 2016. "Hazardous tango: Sovereign-bank interdependencies across countries and time," DNB Working Papers 541, Netherlands Central Bank, Research Department.
    7. repec:eee:eecrev:v:100:y:2017:i:c:p:337-363 is not listed on IDEAS
    8. Zsolt Darvas & Guntram B. Wolff, 2013. "Should Non-Euro Area Countries Join the Single Supervisory Mechanism?," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 2, pages 141-163, June.
    9. George T. Palaiodimos, 2013. "Putting the EMU integration into a new perspective: the case of capital market holdings," Working Papers 168, Bank of Greece.
    10. repec:eee:spacre:v:19:y:2016:i:2:p:227-238 is not listed on IDEAS
    11. Beyer, Andreas & Alter, Adrian, 2013. "The dynamics of spillover effects during the European sovereign debt crisis," Working Paper Series 1558, European Central Bank.
    12. Alter, Adrian & Beyer, Andreas, 2014. "The dynamics of spillover effects during the European sovereign debt turmoil," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 134-153.
    13. Das, Udaibir S. & Oliva, Maria A. & Tsuda, Takahiro, 2012. "Sovereign Risk: A Macro-Financial Perspective," ADBI Working Papers 383, Asian Development Bank Institute.
    14. Fabian Lindner, 2013. "Banken treiben Eurokrise," IMK Report 82-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    15. Serkan Arslanalp & Takahiro Tsuda, 2012. "Tracking Global Demand for Advanced Economy Sovereign Debt," IMF Working Papers 12/284, International Monetary Fund.
    16. Diego Valiante, 2015. "Banking union in a single currency area: evidence on financial fragmentation," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 7(3), pages 251-274, August.
    17. Occhino, Filippo, 2015. "The 2012 Eurozone Crisis and the ECB’s OMT Program: A Debt-Overhang Banking and Sovereign Crisis Interpretation The 2012 Eurozone Crisis and the ECB’s OMT Program: A Debt-Overhang Banking and Sovereig," Working Paper 1509, Federal Reserve Bank of Cleveland.
    18. repec:eee:finsta:v:33:y:2017:i:c:p:311-330 is not listed on IDEAS

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