The Negative Feedback Loop between Banks and Sovereigns

Paolo Angelini Banque d’Italie
Giuseppe Grande Banque d’Italie
Fabio Panetta Banque d’Italie. Contact :

More than three years since the outbreak of the sovereign debt crisis in the euro area, the banking systems of several countries remain exposed to the vagaries of government bond markets. The paper analyses the different channels through which sovereign risk affects banking risk (and vice versa), presents some new evidence on banks-sovereign links, and discusses policy options to address the related risks.

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