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Sovereigns and Financial Intermediaries Spillovers

Author

Listed:
  • Mr. Hamid R Tabarraei
  • Abdelaziz Rouabah
  • Olivier Pierrard

Abstract

We examine the spillover effects between sovereigns and banks in a model with a heterogeneous banking system. An increase in sovereign’s default risk affects financial intermediaries through two channels in this model. First, banks’ funding costs might increase, inducing higher interest rates on loans and bonds and a cut back in these assets. Second, financial regulator’s risk-weighted asset framework would assign higher weights to lower quality assets, implying a portfolio rebalancing and more deleveraging. While capital adequacy requirements weaken the impact of shocks emerging from the real economy, they amplify the effect of shocks on banks’ balance sheets.

Suggested Citation

  • Mr. Hamid R Tabarraei & Abdelaziz Rouabah & Olivier Pierrard, 2019. "Sovereigns and Financial Intermediaries Spillovers," IMF Working Papers 2019/043, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2019/043
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    References listed on IDEAS

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