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Capital Requirements for Government Bonds - Implications for Financial Stability

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Listed:
  • Sterzel, André
  • Neyer, Ulrike

Abstract

Banks hold relatively large amounts of government bonds. Large sovereign exposures reinforce possible financial contagion effects from sovereigns to banks and are a risk for financial stability. Using a theoretical model, we find that the introduction of capital requirements for government bonds induce banks to decrease their investment in government bonds and to increase their investment in high yield assets. This implies that banks' balance sheets become more resilient.

Suggested Citation

  • Sterzel, André & Neyer, Ulrike, 2017. "Capital Requirements for Government Bonds - Implications for Financial Stability," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168172, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc17:168172
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    References listed on IDEAS

    as
    1. Patrick Bolton & Olivier Jeanne, 2011. "Sovereign Default Risk and Bank Fragility in Financially Integrated Economies," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(2), pages 162-194, June.
    2. Frank Heyde & Ulrike Neyer, 2010. "Credit Default Swaps and the Stability of the Banking Sector-super-," International Review of Finance, International Review of Finance Ltd., vol. 10(s1), pages 27-61.
    3. Clemens Bonner, 2016. "Preferential Regulatory Treatment and Banks' Demand for Government Bonds," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(6), pages 1195-1221, September.
    4. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
    5. Allen, Franklin & Carletti, Elena, 2008. "Mark-to-market accounting and liquidity pricing," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 358-378, August.
    6. Acharya, Viral V. & Steffen, Sascha, 2015. "The “greatest” carry trade ever? Understanding eurozone bank risks," Journal of Financial Economics, Elsevier, vol. 115(2), pages 215-236.
    7. Allen, Franklin & Carletti, Elena, 2006. "Credit risk transfer and contagion," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 89-111, January.
    8. Blum, Jurg, 1999. "Do capital adequacy requirements reduce risks in banking?," Journal of Banking & Finance, Elsevier, vol. 23(5), pages 755-771, May.
    9. Hyun, Jung-Soon & Rhee, Byung-Kun, 2011. "Bank capital regulation and credit supply," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 323-330, February.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G01 - Financial Economics - - General - - - Financial Crises

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