Zlatuše Komárková, Vilma Dingová, Luboš Komárek
As the two-way interaction between the financial sector and the government sector grows, so does the dependence between financial stability and fiscal stability. The high creditworthiness of government debt represents both a significant source of certainty for the financial system and a solid basis for the pricing of assets through the supply of “risk-free” government bonds. Given the risk of a downward spiral developing between the two sectors, it is vital, in the interests of financial stability, to monitor fiscal stability in order to put a timely regulatory “block” on excessive interaction. This article illustrates that when assessing sovereign risk in the balance sheets of domestic financial institutions, one needs to consider the dependence of debt sustainability not only on the size of the debt in relation to GDP, but also on the macroeconomic conditions affecting interest rates and economic growth. The article then discusses current and newly proposed prudential policy tools suitable for reducing sovereign risk in financial institutions’ balance sheets.
Issued: June 2013
Download: Thematic article in the Financial Stability Report 2012/2013 (pdf, 339 kB)