Sovereign Default and Domestic Banking
Several recent defaults on sovereign debt were accompanied by major banking crises in the defaulting countries. I argue that the banking crises, triggered by the defaults, were due to inadequate prudential regulations, which did not recognize the riskiness of the government debt. I use a simple model of prudential regulation to illustrate this point. I further investigate whether these â€œinadequate regulationsâ€ can be part of a constrained optimal arrangement which increases the cost of default and permits the government to borrow more ex-ante
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|Date of creation:||03 Dec 2006|
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