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Red Light, Green Light: Should We Deregulate The Banks For Our Own Safety?

One of the more amusing things about the dynamics that fed the Eurozone sovereign debt crisis was the extent to which banks found themselves caught in a kind of vicious, self-feeding loop involving debt issued by their sovereigns. The problem was that as the crisis worsened, banks became the only willing buyers of their sovereigns' bonds. If you're a bank with large holdings of government debt, you don't want to not buy more, because when there's a dearth of natural buyers, you need to step in lest yields should spiral even higher, leading to more capital losses for you, and so on, and so forth. But as that supposedly "riskless" debt got riskier and riskier in Europe, bank balance sheets deteriorated commensurately and in some cases, their access to cheap financing was curtailed (see the Greek ELA example). Here's how the Fed explains it in a paper published in 2014: Doubts about the fiscal soundness of the sovereign, unrelated to the banking system, can also affect banks’ performance. In the extreme case of a sovereign default, losses incurred by the banks due to their holdings of government issued securities could threaten their solvency. Similarly, as sovereign stress leads
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2 comments on “Red Light, Green Light: Should We Deregulate The Banks For Our Own Safety?



  2. Anonymous says:

    Please, The H, just summarize dense material for readers who lack the time to wade through swamps of prose….Thanks….

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