Regulating the Doom Loop

53 Pages Posted: 5 Nov 2020

See all articles by Spyros Alogoskoufis

Spyros Alogoskoufis

affiliation not provided to SSRN

Sam Langfield

European Central Bank

Multiple version iconThere are 2 versions of this paper

Date Written: May, 2018

Abstract

Euro area governments have committed to break the doom loop between bank risk and sovereign risk. But policymakers have not reached consensus on whether and how to reform the regulatory treatment of banks’ sovereign exposures. To inform policy discussions, this paper simulates portfolio reallocations by euro area banks under scenarios for regulatory reform. Simulations highlight a tension in regulatory design between concentration and credit risk. An area-wide low-risk asset—created by pooling and tranching cross-border portfolios of government debt securities— would resolve this tension by expanding the portfolio opportunity set. Banks could therefore reinvest into an asset that has both low concentration and low credit risk.

Keywords: bank regulation, sovereign risk, systemic risk

JEL Classification: G01, G11, G21, G28

Suggested Citation

Alogoskoufis, Spyros and Langfield, Sam, Regulating the Doom Loop (May, 2018). ESRB: Working Paper Series No. 2018/74, Available at SSRN: https://ssrn.com/abstract=3723421

Spyros Alogoskoufis (Contact Author)

affiliation not provided to SSRN

Sam Langfield

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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