The Sovereign-Bank Diabolic Loop and ESBies

Markus Brunnermeier, Luis Garicano, Philip Lane, Marco Pagano, Ricardo Reis, Tano Santos, David Thesmar, Stijn Van Nieuwerburgh and Dimitri Vayanos

American Economic Review, 2016, vol. 106, issue 5, 508-12

Abstract: We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks' domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio--known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.

JEL-codes: E52 G21 G28 H63 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/aer.p20161107
References: Add references at CitEc
Citations: View citations in EconPapers (122)

Downloads: (external link)
https://www.aeaweb.org/articles?id=10.1257/aer.p20161107 (application/pdf)
https://www.aeaweb.org/aer/app/10605/P2016_1107_app.pdf (application/pdf)
https://www.aeaweb.org/aer/ds/10605/P2016_1107_ds.zip (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
Working Paper: The sovereign-bank diabolic loop and ESBies (2016)
Working Paper: The Sovereign-Bank Diabolic Loop and ESBies (2016)
Working Paper: The Sovereign-Bank Diabolic Loop and ESBies (2016)
Working Paper: The Sovereign-Bank Diabolic Loop and Esbies (2016)
Working Paper: The sovereign-bank diabolic loop and ESBies (2016)
Working Paper: The sovereign-bank diabolic loop and ESBies (2016)
Working Paper: The sovereign-bank diabolic loop and ESBies (2016)
Working Paper: The Sovereign-Bank Diabolic Loop and ESBies (2016)
Working Paper: The Sovereign-Bank Diabolic Loop and Esbies (2016)
Working Paper: The Sovereign-Bank Diabolic Loop and ESBies (2016)
Working Paper: The Sovereign-Bank Diabolic Loop and ESBies (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aecrev:v:106:y:2016:i:5:p:508-12

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

Access Statistics for this article

American Economic Review is currently edited by Esther Duflo

More articles in American Economic Review from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().