https://macropaperwarehouse.com/authors/dimitris-papageorgiou/Dimitris PapageorgiouHugo -- gohugo.ioen-usWed, 01 Jan 2025 00:00:00 +0000https://macropaperwarehouse.com/papers/fiscal-distress-and-banking-performance-the-role-of-macroprudential-regulation/Wed, 01 Jan 2025 00:00:00 +0000https://macropaperwarehouse.com/papers/fiscal-distress-and-banking-performance-the-role-of-macroprudential-regulation/<p>This paper studies a transmission channel from sovereign fiscal weakness to banking performance that the literature has largely overlooked: government-provided deposit insurance, rather than banks&rsquo; holdings of sovereign bonds. The motivation comes from the Eurozone crisis (especially Greece), where doubts about a government&rsquo;s ability to honor its deposit-insurance pledge made bank deposits risky and weakened the banking system. The central question is whether allowing macroprudential policy (bank capital requirements) to adjust optimally to the degree of fiscal stress can sever the standard positive co-movement between sovereign and bank credit risk.</p>