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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
2
Banks
Households
Firms
Source of strength
Source of weakness
Leverage
3
Figure 2: Bust in corporate and/or household lending
3
Banks
Households
Firms
Source of strength
Source of weakness
Leverage
4
Figure 3: Bust in corporate and/or household lending leading to credit crunch
4
Banks
Households
Firms
Source of strength
Source of weakness
Leverage
5
Figure 4: Bust in corporate household and/or lending leading to government recapitalisation of banks
5
Firms Banks
Sovereign
Households Source of strength
Source of weakness
Leverage
6
Figure 5: Interaction between bank and sovereign spreadsContamination of sovereign by banks
Irish CDS spreads1
In basis points
7
Figure 6: Banks as source of weakness to sovereign
7
Firms Banks
Sovereign
Households Source of strength
Source of weakness
Leverage
8
Figure 7: Sovereign as source of weakness to banks
8
Firms Banks
Sovereign
Households Source of strength
Source of weakness
Leverage
9
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
10
Firms Banks
Sovereign
Households Source of strength
Source of weakness
Leverage
11
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
12
Firms Banks
Sovereign
Households Source of strength
Source of weakness
Leverage
13
Figure 12: Multi-sovereign backstop for sovereign and banks
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Multisovereign
Source of weakness
Leverage
BanksFirms
Households Source of strength
Sovereign