Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/80493
Authors: 
Uhlig, Harald
Year of Publication: 
2013
Series/Report no.: 
CESifo Working Paper 4368
Abstract: 
This paper seeks to understand the interplay between banks, bank regulation, sovereign default risk and central bank guarantees in a monetary union. I assume that banks can use sovereign bonds for repurchase agreements with a common central bank, and that their sovereign partially backs up any losses, should the banks not be able to repurchase the bonds. I argue that regulators in risky countries have an incentive to allow their banks to hold home risky bonds and risk defaults, while regulators in other “safe” countries will impose tighter regulation. As a result, governments in risky countries get to borrow more cheaply, effectively shifting the risk of some of the potential sovereign default losses on the common central bank.
Subjects: 
Euro zone crisis
sovereign default risk
bank regulation
risk shifting
common central bank
European Central Bank
ECB
repurchase operations
haircuts
JEL: 
E51
E58
E61
E62
E65
G21
G28
H63
Document Type: 
Working Paper

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