The Banking-Sovereign Nexus: Law, Economics & Policy

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This Article examines a previously overlooked policy interdependence between the International Monetary Fund (“IMF”) and the Basel Committee on Banking Supervision (“Basel Committee”), which results from economic dynamics associated with the “banking- sovereign nexus.” The main finding of this Article is that interventions by the IMF and the Basel Committee function as regulatory complements by subtly reinforcing one another through a number of channels. In order to leverage that complementarity, the Article presents the following two-part policy proposal. First, that the Basel Committee enhance the stringency of its capital requirements with an increase in the risk-weights that are assigned to sovereign bonds that banks hold as assets. Second, that the IMF revise its lending criteria to allow countries that have effectively implemented the stricter version of the Basel Rules to prequalify for access to its credit facilities.