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Why are banks not recapitalized during crises?

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  • Crosignani, Matteo

Abstract

I develop a model where the sovereign debt capacity depends on the capitalization of domestic banks. Low-capital banks optimally tilt their government bond portfolio toward domestic securities, linking their destiny to that of the sovereign. If the sovereign risk is sufficiently high, low-capital banks reduce private lending to further increase their holdings of domestic government bonds, lowering sovereign yields and supporting the home sovereign debt capacity. The model rationalizes, in the context of the eurozone periphery, the increase in domestic government bond holdings, the reduction of bank credit supply, and the prolonged fragility of the financial sector. JEL Classification: E44, F33, G21, G28

Suggested Citation

  • Crosignani, Matteo, 2017. "Why are banks not recapitalized during crises?," ESRB Working Paper Series 57, European Systemic Risk Board.
  • Handle: RePEc:srk:srkwps:201757
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    More about this item

    Keywords

    bank capital; bank credit; government bonds; risk-shifting; sovereign crises;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • 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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