Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171936
Authors: 
Neyer, Ulrike
Sterzel, André
Year of Publication: 
2017
Series/Report no.: 
DICE Discussion Paper No. 275
Abstract: 
This paper analyses whether the introduction of capital requirements for bank government bond holdings increases financial stability by making the banking sector more resilient to sovereign debt crises. Using a theoretical model, we show that a sudden increase in sovereign default risk may lead to liquidity issues in the banking sector. Our model reveals that in combination with a central bank acting as a lender of last resort, capital requirements for government bonds increase the shock-absorbing capacity of the banking sector and thus the financial stability. The driving force is a regulation-induced change in bank investment behaviour.
Subjects: 
bank capital regulation
government bonds
sovereign risk
financial contagion
lender of last resort.
JEL: 
G28
G21
G01
ISBN: 
978-3-86304-274-5
Document Type: 
Working Paper

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