Nathaniel Butler Blondel

Abstract. This paper argues that fiscal dominance can arise indirectly through financial regulation. Prudential frameworks treat domestic sovereign debt as the safe asset par excellence, encouraging financial institutions to hold government bonds. This can be stabilising: because sovereign default would damage financial stability, the central bank has a credible reason to prevent inefficient default panics while remaining independent in good times. But the same mechanism can also be malign. A strategic government may issue more debt, anticipating that the central bank will accommodate fiscal stress rather than tolerate the financial damage caused by default. Fiscal dominance then emerges 'by proxy': the government gains leverage over monetary policy through the regulated financial sector. The paper characterises the trade-off between the benign and malign views of sovereign-bank linkages and shows how tighter regulation can both strengthen financial stability and expand the implicit fiscal backstop.

Disclaimer: Any views expressed are solely those of the authors and so cannot be taken to represent those of the Bank of England or to state Bank of England policy. This paper should therefore not be reported as representing the views of the Bank of England or members of the Monetary Policy Committee, Financial Policy Committee or Prudential Regulation Committee.

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Abstract. Since late 2021, UK bank credit facilities extended to non-bank financial intermediaries (NBFIs) have expanded substantially, both in absolute terms and as a share of total bank credit facilities. This shift coincides with the onset of both conventional and unconventional monetary tightening by the Bank of England, yet it remains unclear to what extent monetary tightening has shaped this trend, and if so, whether rate hikes and balance-sheet tightening (QT) have differential effects on the composition of bank credit. We study this question using a panel of individual bank–firm credit relationships drawn from the Large Exposures regime, combined with high-frequency monetary policy surprises decomposed into interest rate and QT components from the UK Monetary Policy Event-Study Database. We find that conventional rate shocks are associated with a broad reduction in loan commitments across both NBFIs and non-financial corporates (NFCs), consistent with both the Bank Lending and Credit Line channels of monetary policy. In contrast, unconventional monetary tightening generates a marked divergence across firm types. Following QT shocks, NFC loan commitments fall while those to NBFIs increase on net – a finding that holds after accounting for bank-level supply conditions, consistent with increased NBFI demand for contingent liquidity.

Abstract. This paper investigates the transmission of oil price shocks to the banking sector in oil-dependent economies, using Oman as a case study. We develop a DSGE model featuring an integrated banking block with endogenous credit rationing and a sovereign wealth fund stabilization rule, calibrated to Omani institutional targets and disciplined by Bayesian methods. Our structural approach disentangles two primary transmission channels: the solvency channel, driven by credit risk and non-performing loans (NPLs), and the liquidity channel, driven by pro-cyclical government deposit withdrawals and sovereign debt issuance. The structural variance decomposition attributes over 54% of non-oil GDP variance and 53% of credit variance to oil price shocks, while bank capital shocks account for less than 0.1%, confirming the quantitative dominance of the liquidity channel. We identify a precautionary liquidity motive—a “liquidity buffer trap”—where banks maintain excess liquidity during booms to hedge against hydrocarbon volatility, structurally suppressing credit to the productive sector. Our counterfactual regime analysis reveals the stabilizing power of credit depth: banking conservatism protects long-term physical capital formation, and the ongoing financialization of the corporate sector— including the rapid growth of Islamic banking and sukuk markets—under Vision 2040 further amplifies this structural resilience. We acknowledge identification challenges inherent in small-sample structural estimation and discuss the sensitivity of results to key modeling assumptions.