How to loosen the banks-sovereign nexus
Paolo Angelini, Giuseppe Grande 08 April 2014
The ‘deadly embrace’ between banks and their government has strengthened with the EZ Crisis. This column argues that this has mostly been consequence rather than a cause of the Crisis. Moreover, adverse bank-sovereign negative feedback depends on the economy-wide effects of the sovereign risk, not just the banks’ direct exposure. Loosening the embrace requires sound public finances and well-capitalized, well-supervised banks – including the banking union project.
Sovereign debtors and their national banking systems are closely linked through a range of direct and indirect channels. These include banks’ claims on sovereigns, semi-automatic links between sovereign and bank credit ratings, public backstops, collateral in banks’ operations, and the effects of fiscal distress on the overall economy – and thus the quality of bank loans (CGFS 2011, Bank of Italy 2013a).
EU institutions Financial markets
bank regulation, capital requirements, home bias, bank capital
Foreign investors and crises: There is no safe haven for all seasons
Maurizio Michael Habib, Livio Stracca 28 February 2014
At the peak of the Global Crisis, the US dollar appreciated and US Treasury yields fell, suggesting that foreign investors were purchasing US assets in general. Actually, they were fleeing only into short-term Treasury bills. This column discusses recent research showing that there are indeed no securities which are consistently a safe haven across different crisis episodes – not even US assets. However, a peculiarity of the US securities is that foreign investors do not necessarily ‘run for the exit’, even when a crisis has its epicentre in the US.
The resilience of the international status of the US dollar remains surprising (Frankel 2013). At the peak of the global financial crisis which started in the US, in particular in the last quarter of 2008, US treasury yields fell and the US dollar appreciated. This has created the impression of a stronger demand for US securities in general. The evidence suggests, however, that non-US residents were instead relatively ‘picky’, fleeing into short-term US Treasury bills but reducing purchases of longer-dated Treasury bonds and shedding other US bonds.
Financial markets Global crisis
US, reserve currency, financial crisis, asset pricing, global crisis, risk aversion, home bias, safe haven, portfolio flows