Sovereign Risk and Bank Risk-Taking [electronic resource] / Anil Ari.

Ari, Anil.
Washington, D.C. : International Monetary Fund, 2017.
IMF eLibrary
IMF Working Papers; Working Paper; No. 17/280
IMF Working Papers
Government document
1 online resource (72 p.)
Local subjects:
All Countries
Banking Crises
Debt Management
I propose a dynamic general equilibrium model in which strategic interactions between banks and depositors may lead to endogenous bank fragility and slow recovery from crises. When banks' investment decisions are not contractible, depositors form expectations about bank risk-taking and demand a return on deposits according to their risk. This creates strategic complementarities and possibly multiple equilibria: in response to an increase in funding costs, banks may optimally choose to pursue risky portfolios that undermine their solvency prospects. In a bad equilibrium, high funding costs hinder the accumulation of bank net worth, leading to a persistent drop in investment and output. I bring the model to bear on the European sovereign debt crisis, in the course of which under-capitalized banks in defaultrisky countries experienced an increase in funding costs and raised their holdings of domestic government debt. The model is quantified using Portuguese data and accounts for macroeconomic dynamics in Portugal in 2010-2016. Policy interventions face a trade-off between alleviating banks' funding conditions and strengthening risk-taking incentives. Liquidity provision to banks may eliminate the good equilibrium when not targeted. Targeted interventions have the capacity to eliminate adverse equilibria.
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Description based on print version record.
Ari, Anil.
Other format:
Print Version: Ari, Anil Sovereign Risk and Bank Risk-Taking
Publisher Number:
10.5089/9781484333051.001 doi
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Restricted for use by site license.
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