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Regulating the doom loop

Author

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  • Alogoskoufis, Spyros
  • Langfield, Sam

Abstract

Euro area governments have committed to break the doom loop between banks and sovereigns.But policymakers disagree on how to treat sovereign exposures in bank regulation. Our contributionis to model endogenous sovereign portfolio reallocation by banks in response toregulatory reform. Simulations highlight a tension between concentration and credit risk inportfolio reallocation. Resolving this tension requires regulatory reform to be complementedby an expansion in the portfolio opportunity set to include an area-wide low-risk asset. Byreinvesting into such an asset, banks would reduce both their concentration and credit riskexposure. JEL Classification: G01, G11, G21, G28

Suggested Citation

  • Alogoskoufis, Spyros & Langfield, Sam, 2019. "Regulating the doom loop," Working Paper Series 2313, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20192313
    Note: 1905193
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    Cited by:

    1. Lorenzo Codogno & Paul van den Noord, 2021. "Assessing Next Generation EU," LEQS – LSE 'Europe in Question' Discussion Paper Series 166, European Institute, LSE.
    2. Antonija Buljan & Milan Deskar-Skrbic & Mirna Dumicic, 2020. "What drives banks’ appetite for sovereign debt in CEE countries?," Public Sector Economics, Institute of Public Finance, vol. 44(2), pages 179-201.
    3. Cronin, David & Dunne, Peter G., 2019. "How effective are sovereign bond-backed securities as a spillover prevention device?," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 49-66.
    4. De Sola Perea, Maite & Dunne, Peter G. & Puhl, Martin & Reininger, Thomas, 2019. "Sovereign bond-backed securities: A VAR-for-VaR and marginal expected shortfall assessment," Journal of Empirical Finance, Elsevier, vol. 53(C), pages 33-52.
    5. Philip R. Lane, 2021. "The Resilience of the Euro," Journal of Economic Perspectives, American Economic Association, vol. 35(2), pages 3-22, Spring.

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    More about this item

    Keywords

    Bank regulation; sovereign risk; systemic risk;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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