Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/102672
Authors: 
Luck, Stephan
Schempp, Paul
Year of Publication: 
2014
Series/Report no.: 
Preprints of the Max Planck Institute for Research on Collective Goods 2014/15
Abstract: 
We provide a model that unifies the notion of self-fulfilling banking crises and sovereign debt crises. In this model, a bank run can be contagious by triggering a sovereign default, and vice versa. A deposit insurance scheme can eliminate the adverse equilibrium only if the government can repay its debt and credibly insure deposits irrespective of the performance of the financial sector. Moreover, we analyze how banking crises and sovereign defaults can be contagious across countries. We give conditions under which the implementation of a banking union is effective and costless. Finally, we discuss the current proposals for a banking union in the euro area and argue that it should be extended by a supranational Deposit Guarantee Scheme.
Subjects: 
bank run
financial crisis
sovereign default
vicious cycle
financial contagion
banking union
deposit insurance
JEL: 
G21
G28
H81
H63
Document Type: 
Working Paper

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