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...

Frontmatter -- Contents -- Introduction -- Part I. Power Shifts and German-French Differences -- 2. Power Shifts -- 3. Historical Roots of German-French Differences -- 4. German-French Differences in Economic Philosophies -- Part II. Monetary and Fiscal Stability: The Ghost of Maastricht -- 5....