Sovereign Default Risk and Bank Balance Sheets
This paper explores how banks' balance sheets and sovereign risk affect macroeconomic fluctuations jointly. The heightened sovereign risk and a potential default constrain the banks' ability to extend credit to firms. This happens through the capital requirement that limits the size of the bank loans to firms and government to a fraction of the banks' equity. An increase in non-performing loans to firms also hampers the bank balance sheets. With the joint interaction of sovereign risk and bank balance sheets in place, the paper, first, shows the bank balance sheet stresses and the government's need for funds to provide deposit insurance can trigger a sovereign default. The paper then examines how the introduction of specific risk weights for certain assets affect macroeconomic fluctuations and, more importantly, the joint determination of sovereign debt and banking crises.
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kishan, Ruby P & Opiela, Timothy P, 2000. "Bank Size, Bank Capital, and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 121-41, February.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2010.
"From Financial Crash to Debt Crisis,"
NBER Working Papers
15795, National Bureau of Economic Research, Inc.
- Van den Heuvel, Skander J., 2008.
"The welfare cost of bank capital requirements,"
Journal of Monetary Economics,
Elsevier, vol. 55(2), pages 298-320, March.
- Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2012.
"Sovereign Default, Domestic Banks, and Financial Institutions,"
462, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2014. "Sovereign Default, Domestic Banks, and Financial Institutions," Journal of Finance, American Finance Association, vol. 69(2), pages 819-866, 04.
- Nicola Gennaioli & Alberto Martín & Stefano Rossi, 2012. "Sovereign Default, Domestic Banks and Financial Institutions," Working Papers 622, Barcelona Graduate School of Economics.
- Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2009. "Sovereign default, domestic banks and financial institutions," Economics Working Papers 1170, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2012.
- Gennaioli, Nicola & Martin, Alberto & Rossi, Stefano, 2010. "Sovereign Default, Domestic Banks and Financial Institutions," CEPR Discussion Papers 7955, C.E.P.R. Discussion Papers.
- Enrique G. Mandoza & Vivian Z. Yue, 2008. "A solution to the default risk-business cycle disconnect," International Finance Discussion Papers 924, Board of Governors of the Federal Reserve System (U.S.).
- Cristina Arellano, 2008.
"Default Risk and Income Fluctuations in Emerging Economies,"
American Economic Review,
American Economic Association, vol. 98(3), pages 690-712, June.
- Arellano, Cristina, 2008. "Default risk and income fluctuations in emerging economies," MPRA Paper 7867, University Library of Munich, Germany.
- Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
When requesting a correction, please mention this item's handle: RePEc:red:sed013:1045. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.