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Is sovereign risk properly addressedby financial regulation?

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  • Nouy, D.

Abstract

The treatment of sovereign risk in banking and insurance regulations has been highlighted by the sovereign debt strains affecting most advanced economies. In particular, it has become key to assess whether these regulations require from financial institutions to hold adequate regulatory capital associated with sovereign exposures. More broadly, although the main issue raised by the sovereign debt crisis is related to fiscal policies and consolidation, one crucial question is to determine how and to what extent financial regulation can help to mitigate and prevent vulnerabilities of the financial sector to sovereign risk. From this perspective, it appears that current regulatory framework does not require from financial institutions to hold significant regulatory capital against sovereign risk, inadequately assuming sovereign debt as a low-risk and even a risk-free asset class. Furthermore, some regulatory initiatives, while globally enhancing standards, could create further incentives to encourage financial institutions to hold sovereign debt. In addition to considering better reflection of sovereign risk in fi nancial regulation, supervisory practices also appear as a crucial tool to address the issue of heightened sovereign risk and its potential impact on financial stability.

Suggested Citation

  • Nouy, D., 2012. "Is sovereign risk properly addressedby financial regulation?," Financial Stability Review, Banque de France, issue 16, pages 95-106, April.
    • Handle: RePEc:bfr:fisrev:2011:16:09
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    References listed on IDEAS

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    1. Michael Davies & Tim Ng, 2011. "The rise of sovereign credit risk: implications for financial stability," BIS Quarterly Review, Bank for International Settlements, September.
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    Cited by:

    1. René Doff, 2016. "The Final Solvency II Framework: Will It Be Effective?," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 41(4), pages 587-607, October.
    2. Spyros Alogoskoufis & Sam Langfield, 2020. "Regulating the Doom Loop," International Journal of Central Banking, International Journal of Central Banking, vol. 16(4), pages 251-292, September.
    3. van Riet, Ad, 2016. "Government Funding Privileges in European Financial Law : Making Public Debt Everybody's Favourite?," Other publications TiSEM b1290139-3e4e-4a2d-a783-9, Tilburg University, School of Economics and Management.
    4. Lang, Michael & Schröder, Michael, 2014. "What drives the demand of monetary financial institutions for domestic government bonds? Empirical evidence on the impact of Basel II and Basel III," ZEW Discussion Papers 14-123, ZEW - Leibniz Centre for European Economic Research.
    5. Donadelli, Michael & Jüppner, Marcus & Prosperi, Lorenzo, 2019. "Risk weighting, private lending and macroeconomic dynamics," Discussion Papers 30/2019, Deutsche Bundesbank.
    6. Buschmann, Christian & Schmaltz, Christian, 2017. "Sovereign collateral as a Trojan Horse: Why do we need an LCR+," Journal of Financial Stability, Elsevier, vol. 33(C), pages 311-330.
    7. Arnould, Guillaume & Dehmej, Salim, 2016. "Is the European banking system robust? An evaluation through the lens of the ECB׳s Comprehensive Assessment," International Economics, Elsevier, vol. 147(C), pages 126-144.
    8. Basse, Tobias, 2020. "Solvency II and sovereign credit risk: Additional empirical evidence and some thoughts about implications for regulators and lawmakers," International Review of Law and Economics, Elsevier, vol. 64(C).
    9. Sergio de Ferra, 2021. "External Imbalances, Gross Capital Flows, and Sovereign Debt Crises," Journal of the European Economic Association, European Economic Association, vol. 19(1), pages 347-402.

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