Research report 2015 - Max Planck Institute for Research on Collective Goods
Financial stability and government bonds
Luck, Stephan; Schempp, Paul
Max-Planck-Institut zur Erforschung von Gemeinschaftsgütern, Bonn
SummaryBanks typically grant long-term loans, but their liabilities are short-term. While this maturity transformation is one of the main features of banks, it also constitutes a major risk factor. A research project at the Max Planck Institute for Research on Collective Goods shows that a strong government can reduce the refinancing risk of banks by providing them with government bonds. In case of countries that are financially interconnected, all parties might benefit if the strong country protects weaker ones by forming a banking union.