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Sovereign Default Risk and Banks in a Monetary Union

  • Uhlig, Harald

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9606.

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Date of creation: Aug 2013
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Handle: RePEc:cpr:ceprdp:9606
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  1. Carmen M. Reinhart, 2011. "A Series of Unfortunate Events: Common Sequencing Patterns in Financial Crises," 'Angelo Costa' Lectures Serie, SIPI Spa, issue Lect. XII.
  2. Reinhart, Carmen M., 2012. "The Return of Financial Repression," CEPR Discussion Papers 8947, C.E.P.R. Discussion Papers.
  3. Fernando Broner & Alberto Martin & Jaume Ventura & Aitor Erce, 2014. "Sovereign debt markets in turbulent times: creditor discrimination and crowding-out effects," Working Papers 1402, Banco de España;Working Papers Homepage.
  4. Acharya, Viral V & Steffen, Sascha, 2013. "The "Greatest" Carry Trade Ever? Understanding Eurozone Bank Risks," CEPR Discussion Papers 9432, C.E.P.R. Discussion Papers.
  5. Hans-Werner Sinn, 2012. "Die Target-Falle: Gefahren für unser Geld und unsere Kinder," Books, by Staff of the Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 2012001, Autumn.
  6. 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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