Sovereign Default Risk and Banks in a Monetary Union
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Harald Uhlig
Abstract
This study seeks to understand the interplay between banks, bank regulation, sovereign default risk and central bank guarantees in a monetary union. I assume that banks can use sovereign bonds for repurchase agreements with a common central bank, and that their sovereign partially backs up any losses should the banks not be able to repurchase the bonds. I argue that regulators in risky countries have an incentive to allow their banks to hold home risky bonds and risk defaults, whereas regulators in other ‘safe’ countries will impose tighter regulation. As a result, governments in risky countries get to borrow more cheaply, effectively shifting the risk of some of the potential sovereign default losses on the common central bank.
© 2019 by Walter de Gruyter Berlin/Boston
Articles in the same Issue
- Editorial
- Fiscal Stability of High-Debt Nations under Volatile Economic Conditions
- Sovereign Default Risk and Banks in a Monetary Union
- Public Debt and Price Stability
- Public Debt in Post-1850 German Economic Thought vis-à-vis the Pre-1850 British Classical School
- Budget Rules and Fiscal Policy: Ten Lessons from Theory and Evidence
- Balanced Budget Requirements and Debt Brakes Feasibility and Enforcement
- On the Political Economy of Public Deficits and Debt
- Democracy, Elections and Government Budget Deficits
- The Politics of Public Debt: Neoliberalism, Capitalist Development and the Restructuring of the State
- It Is Private, Not Public Finances that Are Out of Whack
- Public and Private Debt: The Historical Record (1870–2010)
- What Is the Value of Sovereign Ratings?
Articles in the same Issue
- Editorial
- Fiscal Stability of High-Debt Nations under Volatile Economic Conditions
- Sovereign Default Risk and Banks in a Monetary Union
- Public Debt and Price Stability
- Public Debt in Post-1850 German Economic Thought vis-à-vis the Pre-1850 British Classical School
- Budget Rules and Fiscal Policy: Ten Lessons from Theory and Evidence
- Balanced Budget Requirements and Debt Brakes Feasibility and Enforcement
- On the Political Economy of Public Deficits and Debt
- Democracy, Elections and Government Budget Deficits
- The Politics of Public Debt: Neoliberalism, Capitalist Development and the Restructuring of the State
- It Is Private, Not Public Finances that Are Out of Whack
- Public and Private Debt: The Historical Record (1870–2010)
- What Is the Value of Sovereign Ratings?
