Eurobonds could be double-edged sword, researchers say
High holdings of home-country sovereign debt by banks deter moral hazard but may exacerbate crises, researchers say
The creation of "eurobonds" – jointly issued sovereign debt – for the eurozone could be a double-edged sword for macro-prudential policy, a working paper recently published by the Banque de France says.
In Bailouts, Moral Hazard and Banks' Home Bias for Sovereign Debt, Gaetano Gaballo and Ariel Zetlin-Jones propose a model in which banks' holdings of their own countries' sovereign debt can deter them from excessive risk-taking.
Bank bailouts are likely to be financed by large and unforeseen debt
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