Brunnermeier, Markus K., Garicano, Luis, Lane, Philip R., Pagano, Marco, Reis, Ricardo 
ORCID: 0000-0003-4844-9483, Santos, Tano, Thesmar, David, Nieuwerburgh, Stijn Van and Vayanos, Dimitri ORCID: 0000-0002-0944-4914
(2016)
The sovereign-bank diabolic loop and ESBies.
CEP Discussion Paper (1414).
London School of Economics and Political Science. Centre for Economic Performance, London, UK.
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Abstract
We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.
| Item Type: | Monograph (Discussion Paper) |
|---|---|
| Official URL: | http://cep.lse.ac.uk/ |
| Additional Information: | © 2016 The Authors |
| Divisions: | Economics Finance Centre for Economic Performance |
| Subjects: | H Social Sciences > HG Finance |
| JEL classification: | G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt; Debt Management |
| Date Deposited: | 09 May 2016 15:43 |
| Last Modified: | 17 Nov 2024 20:51 |
| Funders: | Economic and Social Research Council, Economic and Social Research Council |
| URI: | http://eprints.lse.ac.uk/id/eprint/66429 |
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