The Sovereign-Bank Diabolic Loop and ESBies
We propose a simple model of the sovereign-bank diabolic loop, and establish four results. First, the diabolic loop can be avoided by restricting banks domestic sovereign exposures relative to their equity. Second, equity requirements can be lowered if banks only hold senior domestic sovereign debt. Third, such requirements shrink even further if banks only hold the senior tranche of an internationally diversified sovereign portfolio known as ESBies in the euro-area context. Finally, ESBies generate more safe assets than domestic debt tranching alone; and, insofar as the diabolic loop is defused, the junior tranche generated by the securitization is itself risk-free.
This paper is a longer version of an article that will appear in the American Economic Review Papers and Proceedings 2016. We thank Sam Langfield, Saverio Simonelli and Jeremy Stein for insightful comments and Yann Koby for excellent research assistance. The views expressed in this paper do not represent the views of the Central Bank of Ireland, the Eurosystem, or the National Bureau of Economic Research.
Markus K. Brunnermeier
As a guiding principle I follow the NBER Research Disclosure Policy: http://www.nber.org/researchdisclosurepolicy.html
To date, no single relationship (other than my salary form Princeton University) has accounted for more than 10 percent of my aggregate annual income in that year.
Significant Remunerated Activities:
Speaking engagements and lectures
ECB, ESRB, Bundesbank (Research Council), Bank of Korea (Keynote presentation), Bank of England, National Bank of Austria, Swiss National Bank, Bank of Japan, Federal Reserve, New York Fed, Bank of Canada, Bank of Chile, Bank of Korea
International financial institution
Swiss Finance Institute, 2012-
No expert testimony for law suits or paid consulting work for private cooperation to date.
Sloan Foundation 2011-12
Guggenheim Fellowship, 2010-11
INQUIRE Europe, Research Grant
Visiting Scholar and Other:
Milton Friedman Institute, visiting scholar 2011
American Economic Review, Journal of Finance, Associated Editorship
Significant Non-Compensated Activities:
American Finance Association: Director
Financial Advisory Roundtable and Monetary Policy Panel, Federal Reserve Bank of New York, 2006 – present
INET Advisory Board Member, 2009 – presentPhilip Lane
The views in this paper are personal and should not be attributed to the Central Bank of Ireland or the Governing Council of the European Central Bank.Ricardo Reis
I have been an academic consultant or have given lectures receiving modest financial compensation at many policy institutions over the past 3 years, including the Bank of England, the Central Bank of Brasil, the FRB Minneapolis, the FRB New York, the FRB Richmond, the Norges Bank, and the Swiss National Bank. None of these interfered in any way with my research in this paper.
Markus K. Brunnermeier & Luis Garicano & Philip R. Lane & Marco Pagano & Ricardo Reis & Tano Santos & David Thesmar & Stijn Van Nieuwerburgh & Dimitri Vayanos, 2016. "The Sovereign-Bank Diabolic Loop and ESBies," American Economic Review, American Economic Association, vol. 106(5), pages 508-12, May. citation courtesy of