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Financial and real sector interactions: enter the sovereign

Jaime Caruana, General ManagerBank for International Settlements

CAFRAL/BIS conference on "Financial sector regulation for growth, equity and stability in the post crisis world"

Mumbai, 15 November 2011

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Figure 1: Boom in corporate and/or household lending

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Banks

Households

Firms

Source of strength

Source of weakness

Leverage

3

Figure 2: Bust in corporate and/or household lending

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Banks

Households

Firms

Source of strength

Source of weakness

Leverage

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Figure 3: Bust in corporate and/or household lending leading to credit crunch

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Banks

Households

Firms

Source of strength

Source of weakness

Leverage

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Figure 4: Bust in corporate household and/or lending leading to government recapitalisation of banks

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Firms Banks

Sovereign

Households Source of strength

Source of weakness

Leverage

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Figure 5: Interaction between bank and sovereign spreadsContamination of sovereign by banks

Irish CDS spreads1

In basis points

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Figure 6: Banks as source of weakness to sovereign

7

Firms Banks

Sovereign

Households Source of strength

Source of weakness

Leverage

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Figure 7: Sovereign as source of weakness to banks

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Firms Banks

Sovereign

Households Source of strength

Source of weakness

Leverage

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Figure 8: Interaction between bank and sovereign spreads Contamination of banks by sovereign

Greek CDS spreads1

In basis points

10

Figure 9: Sovereign and banks as two-way sources of weakness

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Firms Banks

Sovereign

Households Source of strength

Source of weakness

Leverage

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Figure 10: Interaction between bank and sovereign spreads Banks and sovereign spreads are highly correlated

CDS spreads (in basis points)1

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Figure 11: Sovereign and banks as two-way sources of weakness leading to credit crunch

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Firms Banks

Sovereign

Households Source of strength

Source of weakness

Leverage

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Figure 12: Multi-sovereign backstop for sovereign and banks

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Multisovereign

Source of weakness

Leverage

BanksFirms

Households Source of strength

Sovereign