We analyse the poisonous interaction between bank rescues, financial fragility and sovereign debt discounts. In our model balance sheet constrained financial intermediaries finance both capital expenditure of intermediate goods producers and government deficits. The financial intermediaries face...

This paper studies the optimality of a banking union in a setting with cross-country liquidity spillovers and moral hazard. Generally, the banking union improves welfare by efficiently providing liquidity to banks, thus limiting spillovers from bank defaults across the member countries. At the...