Need for Reform of EU Banking: Decoupling the Solvency of Banks and Sovereigns
Recent developments in Ireland, Greece, and Spain have shown that sovereign debt crises endanger the solvency of domestic banking sectors, while banking crises in turn endanger the solvency of the domestic sovereigns. This diabolic loop between government and bank solvency is exacerbated by the home bias in banks' government bond portfolios, that is, banks' excessive exposure to domestic sovereign debt. Neither current European banking regulation nor plans to implement Basel III in the EU take this interdependence into account. Both treat government bonds of Member States as risk-free, highly liquid assets and exclude them from capital requirements and large exposure regimes. Future EU banking regulation should aim to remedy this. Consequently, EU government bonds could be given risk weights specific to each country. At least in the Euro area, however, a strict limitation of bank investments to cross-border sovereign debt without country-specific risk would be more effective. The advantage of this reform is that it could be integrated into a variety of scenarios for future government refinancing in the Euro area.
Volume (Year): 2 (2012)
Issue (Month): 11 ()
|Contact details of provider:|| Postal: |
Web page: http://www.diw.de/en
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:diw:diwdeb:2012-11-3. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bibliothek)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.