New Findings in Investment Described from Federal Reserve Bank of Philadelphia (Banking Regulation With Risk of Sovereign Default): Investment

2024 JUN 28 (NewsRx) -- By a News Reporter-Staff News Editor at Disease Prevention Daily -- Investigators publish new report on Investment. According to news reporting from Philadelphia, Pennsylvania, by NewsRx journalists, research stated, “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.”

The news correspondents obtained a quote from the research from the Federal Reserve Bank of Philadelphia, “Sovereign defaults then result in banking crises; however, 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 the sovereign bonds.”

According to the news reporters, the research concluded: “We derive a set of testable implications and present supporting empirical evidence from sovereign debt crises in Russia, Argentina, and the Eurozone.”

This research has been peer-reviewed.

For more information on this research see: Banking Regulation With Risk of Sovereign Default. Journal of International Economics, 2024;150. Journal of International Economics can be contacted at: Elsevier, Radarweg 29, 1043 Nx Amsterdam, Netherlands. (Elsevier - www.elsevier.com; Journal of International Economics - http://www.journals.elsevier.com/journal-of-international-economics/)

Our news journalists report that additional information may be obtained by contacting Pablo D’Erasmo, Federal Reserve Bank of Philadelphia, Philadelphia, PA 19106, United States. Additional authors for this research include Igor Livshits and Koen Schoors.

The direct object identifier (DOI) for that additional information is: https://doi.org/10.1016/j.jinteco.2024.103917. This DOI is a link to an online electronic document that is either free or for purchase, and can be your direct source for a journal article and its citation.

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