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Explanation:
The "sovereign-bank nexus" specifically refers to the close link created by banks holding significant amounts of government debt. This creates a feedback loop where the health of the sovereign and the banking sector become intertwined, making banks vulnerable to sovereign risk.
A is incorrect: While fiscal policy does impact bank lending, the nexus is specifically about the direct holdings of government debt.
C is incorrect: While monetary policy affects government borrowing costs, the nexus is about the banks’ holdings of that debt, not the influence of monetary policy itself.
D is incorrect: While regulatory capital requirements are related to bank holdings of government bonds, the nexus itself is about the interconnectedness and vulnerability created by those holdings, not the regulatory framework.
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Q.6411 The term "sovereign-bank nexus" is frequently used in discussions of financial stability. What does this term describe?
A
The impact of government fiscal policy on bank lending and credit creation.
B
The interconnectedness between banks and government debt, specifically where banks hold substantial amounts of government securities.
C
The influence of monetary policy on government borrowing costs and debt sustainability.
D
The regulatory capital requirements imposed on banks based on their holdings of government bonds.