The move by the world’s top banking supervisor could reignite a politically sensitive debate on the relative safety and creditworthiness of different countries’ bonds.
The Basel Committee for Banking Supervision is to examine whether it should rewrite rules governing how sovereign debt affects banks’ capital positions.
The Basel Committee, which dictates the minimum amount of capital banks around the world must hold, made a brief mention on January 23 of its intention to examine the issue during an update of its priorities for 2015. “The committee has initiated a review of the existing regulatory treatment of sovereign risk and will consider potential policy options,” it said. “The review will be conducted in a careful, holistic and gradual manner.”
Current rules state that banks, under so-called zero-risk weighting, do not have to put aside capital to mitigate against the risk of holding their country’s sovereign debt.
But the onset of the eurozone debt crisis highlighted the different risk profiles of the bloc’s member states, an issue also underscored this week as the European Central Bank announced a €60bn-a-month bond-buying programme to counter the spectre of deflation and boost growth.
As part of its large-scale quantitative-easing programme, the ECB broke with tradition for risk-sharing across the bloc after strong pressure from Germany, agreeing that national central banks would assume most of the losses in the event of a default or restructuring of their national debt.
While the Basel Committee did not specify what proposals it may be examining, other regulatory bodies are also scrutinising the interconnectedness between banks and sovereigns.
The euro area’s new Single Supervisory Mechanism — which oversees eurozone banks — has flagged the issue, with Danièle Nouy, the SSM’s head, telling the Financial Times in February that exposure limits on sovereign debt were a possibility. While no concrete proposal has emerged, Fitch Ratings estimated in November that more than a trillion euros of government bonds may have to change hands if regulators pressed ahead with such a plan.
The Basel Committee’s timing is doubly sensitive because banks are already grappling with more rigorous rules to improve their liquidity, as well as increasingly heavy fines for misconduct, which weighs on the amount of capital they must hold to mitigate against such risk. They say this in turn dampens lending to the wider economy and reduces returns to shareholders.
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