Library Header Image
LSE Research Online LSE Library Services

The sovereign-bank diabolic loop and ESBies

Brunnermeier, Markus K, Garicano, Luis, Lane, Philip R., Pagano, Marco, Reis, Ricardo, Santos, Tano, Thesmar, David, Van Nieuwerburgh, Stijn and Vayanos, Dimitri ORCID: 0000-0002-0944-4914 (2016) The sovereign-bank diabolic loop and ESBies. CFM discussion paper series (CFM-DP2016-17). Centre For Macroeconomics, London, UK.

Text - Published Version
Download (445kB) | Preview


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:
Additional Information: © 2016 The Authors
Divisions: Economics
Centre for Macroeconomics
Centre for Economic Performance
Subjects: H Social Sciences > HB Economic Theory
Date Deposited: 13 Dec 2017 08:59
Last Modified: 16 May 2024 12:10

Actions (login required)

View Item View Item


Downloads per month over past year

View more statistics