{
  "title": "Sovereigns and Financial Intermediaries Spillovers",
  "publication": "IMF Working Papers, February 27, 2019",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2019/02/27/sovereigns-and-financial-intermediaries-spillovers-46596",
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  "summary": "We examine the spillover effects between sovereigns and banks in a model with a heterogeneous banking system. An increase in sovereign’s default risk affects financial intermediaries through two channels in this model.",
  "sections": [
    {
      "heading": "Summary of core findings",
      "content": "- The paper examines spillover effects between sovereigns and banks in a model with a heterogeneous banking system.\n- An increase in sovereign’s default risk affects financial intermediaries through two channels:\n  - Banks’ funding costs might increase, inducing higher interest rates on loans and bonds and a cut back in these assets.\n  - A financial regulator’s risk-weighted asset framework would assign higher weights to lower quality assets, implying a portfolio rebalancing and more deleveraging.\n- Capital adequacy requirements have a dual role:\n  - They weaken the impact of shocks emerging from the real economy.\n  - They amplify the effect of shocks on banks’ balance sheets."
    },
    {
      "heading": "Mechanisms and model features",
      "content": "- Heterogeneous banking system underpinning the analysis.\n- Two primary transmission channels from sovereign risk to banks:\n  - Funding-cost channel: higher funding costs → higher interest rates on loans and bonds → contraction in these asset holdings.\n  - Regulatory risk-weight channel: lower quality assets receive higher risk weights → portfolio rebalancing and deleveraging.\n- Interaction between regulatory capital frameworks and shock origins:\n  - Real-economy shocks: capital adequacy requirements mitigate effects.\n  - Balance-sheet shocks (e.g., sovereign downgrades): capital adequacy requirements amplify balance-sheet pressures."
    },
    {
      "heading": "Policy implications and considerations",
      "content": "- Regulatory design matters for how sovereign shocks propagate to banking systems:\n  - Risk-weighted asset frameworks can induce procyclical portfolio adjustments when sovereign risk rises.\n  - Capital adequacy requirements can be stabilizing for real-side disturbances but destabilizing for direct balance-sheet shocks tied to sovereign risk.\n- Monitoring and managing sovereign-bank linkages is essential given the two distinct transmission channels identified."
    },
    {
      "heading": "Key statistics and publication metadata (as presented)",
      "content": "- Pages: 33\n- Volume: 2019\n- Issue: 043\n- Series: Working Paper No. 2019/043\n- DOI: https://doi.org/10.5089/9781498300704.001\n- Stock No: WPIEA2019043\n- ISBN: 9781498300704\n- ISSN: 1018-5941"
    },
    {
      "heading": "Subjects and keywords (as listed)",
      "content": "- Subject: Bank credit, Bank deposits, Banking, Financial institutions, Financial services, Labor, Loans, Money, Self-employment, Sovereign bonds\n- Keywords: balance sheet identity, bank capital, Bank credit, Bank deposits, banking sector, Contagion, deposit bank, Europe, Global, hiterbank market, interest rate, lending bank, leverage ratio, Loans, Northern Europe, Self-employment, Southern Europe, Sovereign bonds, Sovereign risk, sovereigns-banks nexus, wholesale bank, WP\n\nBy Hamid R Tabarraei, Abdelaziz Rouabah, and Olivier Pierrard. February 27, 2019.\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2019/02/27/sovereigns-and-financial-intermediaries-spillovers-46596"
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    "Authors: Hamid R Tabarraei, Abdelaziz Rouabah, Olivier Pierrard",
    "Published: February 27, 2019",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781498300704.001",
    "The paper examines spillover effects between sovereigns and banks in a model with a heterogeneous banking system.",
    "An increase in sovereign’s default risk affects financial intermediaries through two channels:",
    "Capital adequacy requirements have a dual role:",
    "Heterogeneous banking system underpinning the analysis.",
    "Two primary transmission channels from sovereign risk to banks:",
    "Interaction between regulatory capital frameworks and shock origins:",
    "Regulatory design matters for how sovereign shocks propagate to banking systems:",
    "Monitoring and managing sovereign-bank linkages is essential given the two distinct transmission channels identified.",
    "Pages: 33",
    "Volume: 2019",
    "Issue: 043",
    "Series: Working Paper No. 2019/043",
    "DOI: https://doi.org/10.5089/9781498300704.001",
    "Stock No: WPIEA2019043",
    "ISBN: 9781498300704",
    "ISSN: 1018-5941",
    "Subject: Bank credit, Bank deposits, Banking, Financial institutions, Financial services, Labor, Loans, Money, Self-employment, Sovereign bonds",
    "Keywords: balance sheet identity, bank capital, Bank credit, Bank deposits, banking sector, Contagion, deposit bank, Europe, Global, hiterbank market, interest rate, lending bank, leverage ratio, Loans, Northern Europe, Self-employment, Southern Europe, Sovereign bonds, Sovereign risk, sovereigns-banks nexus, wholesale bank, WP",
    "**Working Paper**"
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