The Sovereign-Bank Diabolic Loop and ESBies /
Brunnermeier, Markus K.
The Sovereign-Bank Diabolic Loop and ESBies / Markus K. Brunnermeier, Luis Garicano, Philip Lane, Marco Pagano, Ricardo Reis, Tano Santos, David Thesmar, Stijn Van Nieuwerburgh, Dimitri Vayanos. - Cambridge, Mass. National Bureau of Economic Research 2016. - 1 online resource: illustrations (black and white); - NBER working paper series no. w21993 . - Working Paper Series (National Bureau of Economic Research) no. w21993. .
February 2016.
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.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.
The Sovereign-Bank Diabolic Loop and ESBies / Markus K. Brunnermeier, Luis Garicano, Philip Lane, Marco Pagano, Ricardo Reis, Tano Santos, David Thesmar, Stijn Van Nieuwerburgh, Dimitri Vayanos. - Cambridge, Mass. National Bureau of Economic Research 2016. - 1 online resource: illustrations (black and white); - NBER working paper series no. w21993 . - Working Paper Series (National Bureau of Economic Research) no. w21993. .
February 2016.
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.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.