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- W25125871 abstract "Several recent defaults on sovereign debt were accompanied by major banking crises in the defaulting countries. I argue that the banking crises, triggered by the defaults, were due to inadequate prudential regulations, which did not recognize the riskiness of the government debt. I use a simple model of prudential regulation to illustrate this point. I further show that the failure to adjust prudential regulation can be a conscious decision of the government, rather than an oversight. When risky government debt is considered safe by the regulation, domestic banks gamble by constructing portfolios correlated with government default. These banks bid up the price of the government bonds, which lowers government’s cost of borrowing and may postpone (and give a chance to avoid) the default. I provide supporting evidence from the Russian 1998 crisis." @default.
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- W25125871 date "2007-01-01" @default.
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- W25125871 title "Sovereign Default and Banking" @default.
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