Intertwined Sovereign and Bank Solvencies in a Model of Self-Fulfilling Crisis

July 1, 2012

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Format: Chicago

Gustavo Adler. Intertwined Sovereign and Bank Solvencies in a Model of Self-Fulfilling Crisis, (USA: International Monetary Fund, 2012) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Large fiscal financing needs, both in advanced and emerging market economies, have often been met by borrowing heavily from domestic banks. As public debt approached sustainability limits in a number of countries, however, high bank exposure to sovereign risk created a fragile inter-dependence between fiscal and bank solvency. This paper presents a simple model of twin (sovereign and banking) crisis that stresses how this interdependence creates conditions conducive to a self-fulfilling crisis.

Subject: Banking, Credit, Domestic debt, Financial crises, Financial institutions, Money, Nonbank financial institutions, Public debt

Keywords: Bank exposure, Bank solvencies in a model, Banking crisis, Budget constraint, Credit, Crisis equilibrium, Domestic debt, Maximization problem, Nonbank financial institutions, Senior debt, Seniority structure, Sovereign debt crisis, Supply schedule, Twin crisis, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/178
Stock No:

WPIEA2012178
ISBN:

9781475505269
ISSN:

1018-5941

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