Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/208347 
Year of Publication: 
2019
Series/Report no.: 
ECB Working Paper No. 2313
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
Euro area governments have committed to break the doom loop between banks and sovereigns. But policymakers disagree on how to treat sovereign exposures in bank regulation. Our contribution is to model endogenous sovereign portfolio reallocation by banks in response to regulatory reform. Simulations highlight a tension between concentration and credit risk in portfolio reallocation. Resolving this tension requires regulatory reform to be complemented by an expansion in the portfolio opportunity set to include an area-wide low-risk asset. By reinvesting into such an asset, banks would reduce both their concentration and credit risk exposure.
Subjects: 
Bank regulation
sovereign risk
systemic risk
JEL: 
G01
G11
G21
G28
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3882-2
Document Type: 
Working Paper

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