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A call for uniform sovereign exposure limits

Bongaerts, Dion, Schoenmaker, Dirk , (2017), “A call for uniform sovereign exposure limits”, Bruegel, 28 Μαρτίου

In recent years we have seen sovereign financial problems spilling into the banking sector because the banking sectors have held a very large share of the domestic sovereign debt. This is clearly not desirable. First, by buying these domestic sovereign bonds, the banking sector allows governments to overspend. Second, the excess bad sovereign debt crowds out private credit to the real economy (Acharya et al, 2016). This creates a negative feedback effect on the economy. Third, banks that are overloaded with domestic government bonds eventually might have to bailed out, which continues the the vicious cycle between governments and banks. This loop was at heart of the euro-sovereign crisis.

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