In summer 2011, elevated sovereign risk in Eurozone peripheral countries increased the solvency risk of Eurozone banks, precipitating a run on their short-term debt. We assess the effectiveness of different European Central Bank (ECB) interventions that followed – lender of last resort vs....

If monetary policy is to aim at financial stability, how would it change? To analyze this question, this paper develops a general-form, axiomatic framework. Financial stability objectives are shown to make a monetary authority more conservative and more aggressive. Conservative as it sets higher...

If monetary policy is to aim also at financial stability, how would it change? To analyze this question, this paper develops a general-form, axiomatic framework. Financial stability objectives are shown to make a monetary authority more aggressive. By that we mean that in reaction to negative...

This paper shows that a rate hike has countervailing effects on banks' risk appetite. It reduces risk when the debt burden of the banking sector is modest. We model a regulator whose trade-off between bank risk and credit supply is derived from a welfare function. We show that the regulator...

Since the summer of 2007, the financial system has faced two major systemic crises. European banks have been at the center of both crises, particularly of the European sovereign debt crisis. This article analyzes systemic risk of European banks across both crises exploiting the specific...

Why should monetary policy 'lean against the wind'? Can't bank regulation perform its task alone? We model banks that choose both asset volatility and leverage, and identify how monetary policy transmits to bank risk. Subsequently, we introduce a regulator whose tool is a risk-based capital...

If monetary policy is to aim also at financial stability, how would it change? To analyze this question, this paper develops a general-form framework. Financial stability objectives are shown to make monetary policy more aggressive: in reaction to negative shocks, cuts are deeper but...

Using a comprehensive dataset from German banks, we document the usage of sovereign credit default swaps (CDS) during the European sovereign debt crisis of 2008-2013. Banks used the sovereign CDS market to extend, rather than hedge, their long exposures to sovereign risk during this period....

Using a comprehensive dataset from German banks, we document the usage of sovereign credit default swaps (CDS) during the European sovereign debt crisis of 2008-2013. Banks used the sovereign CDS market to extend, rather than hedge, their long exposures to sovereign risk during this period....

We provide evidence consistent with a “credit-line drawdown channel” to explain the large and persistent crash of bank stock prices during the COVID-19 pandemic. Stock prices of banks with large ex-ante exposures to undrawn credit lines and large ex-post gross drawdowns declined more,...