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The diabolic loop between sovereign and banking risk in the euro area

Author

Listed:
  • Marta Gómez-Puig

    (Department of Economics & Riskcenter, Universitat de Barcelona, Spain.)

  • Simón Sosvilla-Rivero

    (Complutense Institute for Economic Analysis, Universidad Complutense de Madrid, 28223 Madrid, Spain.)

Abstract

Multiple interconnected channels link banks and governments: the sovereign-exposure channel (banks hold significant amounts of sovereign debt), the safety net channel (government guarantees protect banks), and the macroeconomic channel (bank and government health affect and is affected by economic activity). However, the sovereign-bank nexus in euro-area countries is particularly worrying since its member states issue debt in a currency they do not directly control and cannot ensure nominal repayment to bondholders. In this work, we summarise the main theoretical and empirical contributions that analyse this phenomenon and the legislative and institutional initiatives to reduce sovereign exposures in the banking sector.

Suggested Citation

  • Marta Gómez-Puig & Simón Sosvilla-Rivero, 2024. "The diabolic loop between sovereign and banking risk in the euro area," IREA Working Papers 202406, University of Barcelona, Research Institute of Applied Economics, revised Feb 2024.
    • Handle: RePEc:ira:wpaper:202406
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    References listed on IDEAS

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    Cited by:

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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