Bridge over Troubled Monetary Union: A Reply to De Grauwe & Ji
In: Journal of common market studies: JCMS, Band 58, Heft S1
ISSN: 1468-5965
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In: Journal of common market studies: JCMS, Band 58, Heft S1
ISSN: 1468-5965
Euro area governments have committed to break the doom loop between banks and sovereigns. But policymakers disagree on how to treat sovereign exposures in bank regulation. Our contribution is to model endogenous sovereign portfolio reallocation by banks in response to regulatory reform. Simulations highlight a tension between concentration and credit risk in portfolio reallocation. Resolving this tension requires regulatory reform to be complemented by an expansion in the portfolio opportunity set to include an area-wide low-risk asset. By reinvesting into such an asset, banks would reduce both their concentration and credit risk exposure.
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Euro area governments have committed to break the doom loop between bank risk and sovereign risk. But policymakers have not reached consensus on whether and how to reform the regulatory treatment of banks' sovereign exposures. To inform policy discussions, this paper simulates portfolio reallocations by euro area banks under scenarios for regulatory reform. Simulations highlight a tension in regulatory design between concentration and credit risk. An area-wide low-risk asset - created by pooling and tranching cross-border portfolios of government debt securities - would resolve this tension by expanding the portfolio opportunity set. Banks could therefore reinvest into an asset that has both low concentration and low credit risk.
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In: Economic policy, Band 31, Heft 85, S. 51-106
ISSN: 1468-0327
In: ECB Working Paper No. 1797
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In: ESRB: Occasional Paper Series 201815
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In: Economic policy, Band 28, Heft 74, S. 289-333
ISSN: 1468-0327
In: ECB Working Paper No. 1484
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In: IMF Working Paper No. 19/100
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In: ESRB: Working Paper Series No. 2018/86
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In: Swiss Finance Institute Research Paper No. 17-70
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