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Reforming the Regulatory Treatment of Sovereign Exposures in Banking Regulation

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  4. Vol. 53, Issue 1
  5. pp. 81–122

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Sterzel, A. Reforming the Regulatory Treatment of Sovereign Exposures in Banking Regulation. Credit and Capital Markets – Kredit und Kapital, 53(1), 81-122. https://doi.org/10.3790/ccm.53.1.81
Sterzel, André "Reforming the Regulatory Treatment of Sovereign Exposures in Banking Regulation" Credit and Capital Markets – Kredit und Kapital 53.1, 2020, 81-122. https://doi.org/10.3790/ccm.53.1.81
Sterzel, André (2020): Reforming the Regulatory Treatment of Sovereign Exposures in Banking Regulation, in: Credit and Capital Markets – Kredit und Kapital, vol. 53, iss. 1, 81-122, [online] https://doi.org/10.3790/ccm.53.1.81
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Reforming the Regulatory Treatment of Sovereign Exposures in Banking Regulation

Sterzel, André

Credit and Capital Markets – Kredit und Kapital, Vol. 53 (2020), Iss. 1 : pp. 81–122

1 Citations (CrossRef)

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Article Details

Publisher Name
Duncker & Humblot
DOI
https://doi.org/10.3790/ccm.53.1.81
Language
English
Pages
42
Keywords

Author Details

Heinrich Heine University Düsseldorf, Department of Economics, Universitäts­straße 1, 40225 Düsseldorf, Germany

Cited By

  1. Banking Regulation and Sovereign Default Risk: How Regulation Undermines Rules

    Hülsewig, Oliver

    Steinbach, Armin

    (2024)

    https://doi.org/10.2139/ssrn.4889238 [Citations: 0]

References

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  39. Gros, D. (2013): Banking union with a sovereign virus. Intereconomics 48 (2), 93–97.  Google Scholar
  40. Klose, J./Weigert, B. (2014): Sovereign yield spreads during the euro crisis: Fundamental factors versus redenomination risk. International Finance 17 (1), 25–50.  Google Scholar
  41. Lanotte, M./Manzelli, G./Rinaldi, A. M./Taboga, M./Tommasino, P. (2016): Easier said than done? Reforming the prudential treatment of banks’ sovereign exposures. European Economy (1), 73–104.  Google Scholar
  42. Lenarčič, A./Mevis, D./Siklós, D. (2016): Tackling sovereign risk in European banks. Discussion Paper Series, No. 1, European Stability Mechanism.  Google Scholar
  43. Matthes, D./Rocholl, J. (2017): Breaking the doom loop: The euro zone basket. ESMP White Paper, No. WP-17-01, ESMT European School of Management and Technology.  Google Scholar
  44. Neyer, U./Sterzel, A. (2017): Capital requirements for government bonds – Implications for bank behaviour and financial stability. DICE Discussion Paper, No. 275, Heinrich-Heine-Universität Düsseldorf.  Google Scholar
  45. Neyer, U./Sterzel, A. (2018): Preferential treatment of government bonds in liquidity regulation – Implications for bank behaviour and financial stability. DICE Discussion Paper, No. 301, Heinrich-Heine-Universität Düsseldorf.  Google Scholar
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  49. Weidmann, J. (2016): Dinner speech at the 6th Frankfurt Finance Summit, Frankfurt Main, May 11th. Available at https://www.bundesbank.de/en/press/speeches/dinner-speech-667106. Accessed: 2018-09-03.  Google Scholar
  50. Zettelmeyer, J./Trebesch, C./Gulati, M. (2013): The Greek debt restructuring: An autopsy. Economic Policy 28(75), 513–563.  Google Scholar
  51. Abad, J. (2018): Breaking the feedback loop: Macroprudential regulation of banks’ sovereign exposures. mimeo.  Google Scholar
  52. Acharya, V. V./Rajan, R. G. (2013): Sovereign debt, government myopia, and the financial sector. The Review of Financial Studies 26 (6), 1526–1560.  Google Scholar
  53. Acharya, V. V./Steffen, S. (2015): The “greatest” carry trade ever? Understanding eurozone bank risks. Journal of Financial Economics 115 (2), 215–236.  Google Scholar
  54. Adrian, T./Shin, H. S. (2010): Liquidity and leverage. Journal of Financial Intermediation 19 (3), 418–437.  Google Scholar
  55. Alesina, A./de Broeck, M./Prati, A./Tabellini, G. (1992): Default risk on government debt in OECD countries. Economic Policy 7 (15), 427–463.  Google Scholar
  56. Alogoskoufis, S./Langfield, S. (2018): Regulating the doom loop. ESRB Working Paper Series No. 74, European Systemic Risk Board.  Google Scholar
  57. Andritzky, J./Gadatsch, N./Körner, T./Schäfer, A./Schnabel, I. (2016): Removing privileges for banks’ sovereign exposures – a proposal. European Economy (1), 139–153.  Google Scholar
  58. Ari, A. (2016): Sovereign risk and bank risk-taking. ECB Working Paper, No. 1894, European Central Bank.  Google Scholar
  59. Barrios, S./Iversen, P./Lewandowska, M./Setzer, R. (2009): Determinants of intra-euro area government bond spreads during the financial crisis. Economic Papers, No. 388, European Commission.  Google Scholar
  60. Baum, C. F./Schäfer, D./Stephan, A. (2016): Credit rating agency downgrades and the eurozone sovereign debt crises. Journal of Financial Stability 24, 117–131.  Google Scholar
  61. Bayer, C./Kim, C./Kriwoluzky, A. (2018): The term structure of redenomination risk. DIW Discussion Papers No. 1740, Deutsches Institut für Wirtschaftsforschung.  Google Scholar
  62. BCBS (2006): International convergence of capital measurement and capital standards: A revised framework – comprehensive version. Bank for International Settlements.  Google Scholar
  63. BCBS (2010): Basel III: A global regulatory framework for more resilient banks and banking systems. Bank for International Settlements.  Google Scholar
  64. BCBS (2013): Basel III: The liquidity coverage ratio and liquidity risk monitoring. Bank for International Settlements.  Google Scholar
  65. BCBS (2014a): Basel III leverage ratio framework and disclosure requirements. Bank for International Settlements.  Google Scholar
  66. BCBS (2014b): Basel III: The net stable funding ratio. Bank for International Settlements.  Google Scholar
  67. BCBS (2014c): Supervisory framework for measuring and controlling large exposures. Bank for International Settlements.  Google Scholar
  68. BCBS (2017): The regulatory treatment of sovereign exposures. Discussion Paper, Bank for International Settlements.  Google Scholar
  69. BCBS (2018): Basel III monitoring report. Bank for International Settlements.  Google Scholar
  70. Becker, B./Ivashina, V. (2017): Financial repression in the European sovereign debt crisis. Review of Finance 22 (1), 83–115.  Google Scholar
  71. Bolton, P./Jeanne, O. (2011): Sovereign default risk and bank fragility in financially integrated economies. IMF Economic Review 59 (2), 162–194.  Google Scholar
  72. Bonner, C. (2016): Preferential regulatory treatment and banks’ demand for government bonds. Journal of Money, Credit and Banking 48 (6), 1195–1221.  Google Scholar
  73. Broner, F./Erce, A./Martin, A./Ventura, J. (2014): Sovereign debt markets in turbulent times: Creditor discrimination and crowding-out effects. Journal of Monetary Economics 61, 114–142.  Google Scholar
  74. Bundesverfassungsgericht (2016): Constitutional complaints and Organstreit proceedings against the OMT programme of the European Central Bank unsuccessful. Press release No. 34/2016 of 21 June 2016.  Google Scholar
  75. Buschmann, C./Schmaltz, C. (2017): Sovereign collateral as a trojan horse: Why do we need an LCR+. Journal of Financial Stability 33, 311–330.  Google Scholar
  76. CGFS (2011): The impact of sovereign credit risk on bank funding conditions. CGFS Papers, No. 43, Bank for International Settlements.  Google Scholar
  77. Chari, V. V./Dovis, A./Kehoe. P. J. (2014): On the optimality of financial repression. mimeo.  Google Scholar
  78. Court of Justice of the European Union (2018): The ECS’s PSPP programme for the purchase of government bonds on secondary markets does not infringe EU law. Press release No. 192/18 of 11 December 2018.  Google Scholar
  79. Damodaran, A. (2010): Into the abyss: What if nothing is risk free? mimeo.  Google Scholar
  80. Das, U. S./Papaioannou, M. G./Trebesch, C. (2012): Sovereign debt restructurings 1950–2010: Literature survey, data, and stylized facts. IMF Working Paper, No. WP/12/203, International Monetary Fund.  Google Scholar
  81. De Marco, F./Macchiavelli, M. (2016): The political origin of home bias: The case of Europe. Finance and Economics Discussion Series, No. 2016-060, Federal Reserve System.  Google Scholar
  82. Di Cesare, A./Grande, A./Manna, M./Taboga, M. (2012): Recent estimates of sovereign risk premia for euro-area countries. Occasional Paper, No. 128, Banca D’Italia.  Google Scholar
  83. EBA (2013): Report on appropriate uniform definitions of extremely high quality liquid assets (extremely HQLA) and high quality liquid assets (HQLA) and on optional requirements for liquid assets under Article 509(3) and (5) CRR.  Google Scholar
  84. ECB (2010): ECB announces change in eligibility of debt instruments issued or guaranteed by the Greek government. Available at https://www.ecb.europa.eu/press/pr/date/2010/html/pr100503.en.html. Press Release, Accessed: 2018-12-18.  Google Scholar
  85. ESRB (2015): ESRB report on the regulatory treatment of sovereign exposures. Available at http://www.esrb.europa.eu/pub/pdf/other/esrbreportregulatorytreatmentsovereignexposures032015.en.pdf? c0cad80cf39a74e20d9d5947c7390df1. Accessed: 2018-12-18.  Google Scholar
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  87. Gennaioli, N./Martin, A./Rossi, S. (2014): Sovereign default, domestic banks, and financial institutions. The Journal of Finance 69 (2), 819–866.  Google Scholar
  88. German Council of Economic Experts (2015): Economic policy: Focus on future viability. Annual Report 2015/2016.  Google Scholar
  89. Gros, D. (2013): Banking union with a sovereign virus. Intereconomics 48 (2), 93–97.  Google Scholar
  90. Klose, J./Weigert, B. (2014): Sovereign yield spreads during the euro crisis: Fundamental factors versus redenomination risk. International Finance 17 (1), 25–50.  Google Scholar
  91. Lanotte, M./Manzelli, G./Rinaldi, A. M./Taboga, M./Tommasino, P. (2016): Easier said than done? Reforming the prudential treatment of banks’ sovereign exposures. European Economy (1), 73–104.  Google Scholar
  92. Lenarcic, A./Mevis, D./Siklós, D. (2016): Tackling sovereign risk in European banks. Discussion Paper Series, No. 1, European Stability Mechanism.  Google Scholar
  93. Matthes, D./Rocholl, J. (2017): Breaking the doom loop: The euro zone basket. ESMP White Paper, No. WP-17-01, ESMT European School of Management and Technology.  Google Scholar
  94. Neyer, U./Sterzel, A. (2017): Capital requirements for government bonds – Implications for bank behaviour and financial stability. DICE Discussion Paper, No. 275, Heinrich-Heine-Universität Düsseldorf.  Google Scholar
  95. Neyer, U./Sterzel, A. (2018): Preferential treatment of government bonds in liquidity regulation – Implications for bank behaviour and financial stability. DICE Discussion Paper, No. 301, Heinrich-Heine-Universität Düsseldorf.  Google Scholar
  96. Pepino, S. (2015): Sovereign risk and financial crisis: The international political economy of the eurozone. Basingstoke: Palgrave Macmillan.  Google Scholar
  97. Reinhart, C. M./Rogoff, K. S. (2010): This time is different: Eight centuries of financial folly. Princeton: Princeton University Press.  Google Scholar
  98. Schneider, Y./Steffen, S. (2018): Feasibility check: transition to a new regime for bank sovereign exposure? Study provided at the request of the Economic and Monetary Affairs Committee, European Parliament.  Google Scholar
  99. Weidmann, J. (2016): Dinner speech at the 6th Frankfurt Finance Summit, Frankfurt Main, May 11th. Available at https://www.bundesbank.de/en/press/speeches/dinner-speech-667106. Accessed: 2018-09-03.  Google Scholar
  100. Zettelmeyer, J./Trebesch, C./Gulati, M. (2013): The Greek debt restructuring: An autopsy. Economic Policy 28(75), 513–563.  Google Scholar

Abstract

The European sovereign debt crisis has shown the tight linkage between sovereign and bank balance sheets. In the aftermath of the crisis, several reforms have been discussed in order to mitigate the sovereign-bank nexus. These reforms include the abolishment of preferential government bond treatment in banking regulation. This paper gives a detailed overview of literature and data which are closely related to the existing preferential sovereign bond treatment in bank regulation and highlights the need for reforms especially in the euro area. Against this background, the following three regulatory reforms are described and discussed: (i) positive risk weights for government bonds in bank capital regulation, (ii) sovereign exposure limits, and (iii) haircuts for government bonds in bank liquidity regulation. The discussion focusses on the effects of these reforms for bank behaviour and financial stability.

Table of Contents

Section Title Page Action Price
André Sterzel: Reforming the Regulatory Treatment of Sovereign Exposures in Banking Regulation 81
I. Introduction 81
II. Regulatory Treatment of Sovereign Exposures 83
1. Risk Weights for Sovereign Bonds 83
2. Leverage Ratio 86
3. Large Exposure Framework 87
4. Liquidity Requirements 87
III. Sovereign Risk 89
1. Sovereign Risk and Sovereign Defaults 89
2. Sovereign Risk and Sovereign Defaults in the Euro Area 81
3. Banks’ Sovereign Bond Holdings in the Euro Area 81
4. Why Banks Hold Sovereign Bonds 81
IV. Contagion Channels Between Sovereigns and Banks 81
1. Direct Exposure Channel (or Asset Holding Channel) 81
2. Collateral Channel (or Liquidity Channel) 82
3. Government Support Channel 82
4. Sovereign Credit Rating Channel 82
5. Sovereign-Bank Nexus 82
V. Discussion of Regulatory Reforms 82
1. Positive Risk Weights for Government Bonds 82
2. Sovereign Exposure Limits 83
3. Haircuts for Government Bonds 83
VI. Conclusion 83
References 83

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