Economics Seminar: Banking Regulation with Risk of Sovereign Default | Shiv Nadar University
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Economics Seminar: Banking Regulation with Risk of Sovereign Default

Event Date: 
Friday, December 10, 2021 -

The Department of Economics invites you to a virtual seminar titled 'Banking Regulation with Risk of Sovereign Default’ (jointly with Igor Livshits and Koen Schoors) by Dr. Pablo D'Erasmo, Economic Advisor and Economist Federal Reserve Bank of Philadelphia, on 10 December 2021 at 5:30 PM.

Banking regulation routinely designates domestic government debt as safe, even when this debt is risky. We show, in a parsimonious model, that this failure to recognize the riskiness of government debt induces domestic banks to ``gamble'' with depositors' funds by purchasing risky government bonds and assets correlated with them. Sovereign defaults then result in banking crises but, by permitting banks to gamble, the regulator lowers the government's borrowing costs ex-ante. Thus, the government has an incentive to ignore the riskiness of sovereign bonds. We present supporting empirical evidence from sovereign debt crises in Russia, Argentina, and the Eurozone.

Friday 10, Dec 2021
05:30 PM - 06:30 PM