The rise of sovereign credit risk: implications for financial stability

BIS Quarterly Review  |  September 2011  | 
19 September 2011

The financial crisis and economic recession, and policymakers' responses to these events, have raised sovereign risk concerns in a number of advanced economies. This has increased the cost and reduced the stability of funding for banks. It has also meant that decisions about the maturity of government debt have become important to the dynamics of systemic financial distress. This article looks at the financial stability issues involved, drawing from two recent studies by the Committee on the Global Financial System (CGFS). A return to sustainable government finances over the medium term is fundamental to managing current difficulties. Banks improving their funding and asset risk management, lengthening of government debt maturities and sound banking regulation are also important. And the different policy agencies involved need to ensure that they are aware of each other's objectives and operational plans, while maintaining clear lines of accountability.

JEL classification: E58, E60, E61, G21