Beiträge zur Jahrestagung des Vereins für Socialpolitik 2017: Alternative Geld- und Finanzarchitekturen - Session: Financial Regulation II B16-V3
Banks hold relatively large amounts of government bonds. Large sovereign exposures reinforce possible financial contagion effects from sovereigns to banks and are a risk for financial stability. Using a theoretical model, we find that the introduction of capital requirements for government bonds induce banks to decrease their investment in government bonds and to increase their investment in high yield assets. This implies that banks' balance sheets become more resilient.