OECD Working Papers on Finance, Insurance and Private Pensions

ISSN: 
2079-7117 (online)
http://dx.doi.org/10.1787/20797117
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Selected studies on finance, insurance and private pensions policy prepared for dissemination in order to stimulate wider discussion and further analysis and obtain feedback from interested audiences. The studies provide timely analysis and background on industry developments, structural issues, and public policy in the financial sector. Topics include risk management, governance, investments, benefit protection, and financial education. Previous papers addressing these policy issues are available via http://dx.doi.org/10.1787/19936397.
 

The EU Stress Test and Sovereign Debt Exposures You or your institution have access to this content

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Author(s):
Adrian Blundell-Wignall1, Patrick Slovik1
Author Affiliations
  • 1: OECD, France

01 Aug 2010
Bibliographic information
No.:
4
Pages:
13
http://dx.doi.org/10.1787/5km7vxjwzhd4-en

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This working paper’s quantifications show that most sovereign debt is held on the banking books of banks, whereas the EU stress test considered only their small trading book exposures. It discusses why sovereign debt held in the banking book cannot be ignored by investors and creditors, because of: (a) recovery values in the event of individual bank failures; and (b) fiscal sustainability and structural competitiveness issues which mean the market cannot give a zero probability to debt restructurings beyond the period of the stress test and/or the period after which the role of the European Financial Stability Facility Special Purpose Vehicle (EFSF SPV) comes to an end. How the SPV could operate to shift sovereign risk from banks to the public sector is also an important part of the discussion.
Keywords:
financial stability
JEL Classification:
  • E62: Macroeconomics and Monetary Economics / Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook / Fiscal Policy
  • G21: Financial Economics / Financial Institutions and Services / Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages
  • G28: Financial Economics / Financial Institutions and Services / Government Policy and Regulation
 
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