Banks and Governments: An Arial View
16 Pages Posted: 19 Oct 2013
Date Written: 2013
Financial systems and public treasuries are communicating vessels: strength or weakness in one flows to the other, and back. This chapter considers the implications of this insight using case studies from Europe, Asia, and Latin America. The connection is not unique to Europe, although it does not always result in feedback effects, or the 'doom loop' that has made headlines since 2010. Events now known as banking or government debt crises often have had elements of both, and could have gone either way. Policy and political choices determined their path. In all cases, governments were as indispensable for resolving banking crises as banks were for resolving sovereign debt crises. As capital movements have become more rapid and global, the bank-government link has turned more destructive, prompting proposals to break it for good. Some of these proposals may adjust, elaborate, or displace the link. None would break it. Instead of chasing the fantasy of total separation, the policy goal should be to reduce destruction and harness the link in the name of financial stability.
Keywords: banking, sovereign debt, financial crisis, Eurozone
JEL Classification: F34, G15, G20, G28, H63, H81, K2, N20, P16, P43, P49
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