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001-es BibID:	BIBFORM063205
Első szerző:	Lenarcic, Andreja (közgazdász)
Cím:	Tackling sovereign risk in European banks / Andreja Lenarcic, Dirk Mevis, Dora Siklos
Dátum:	2016
Megjelenés:	Luxembourg : ESM, 2016
Terjedelem:	42 p.
ISSN:	2467-2025
Megjegyzések:	(ESM Discussion Paper Series ; 1.) The tight linkage between sovereign and bank balance sheets magnified thedepth of the European sovereign debt crisis. As a response to this, reformefforts are therefore focused on severing this vicious tie. Some progress hasbeen made. The Banking Union framework addresses the transfer of bankingsector risk to the sovereign. Policy makers are now discussing how to addressthe treatment of sovereign debt on bank balance sheets. Currently, it is treatedas risk free. Zero risk weights are applied, meaning banks do not need to setaside capital to protect themselves from potential losses in these securities. Nordo banks have any limits on their exposure to a particular sovereign.This discussion paper analyses the two widely discussed basic options toaddress this regulatory gap: applying non-zero risk weights to sovereign exposures, and putting limits on exposures to sovereigns, akin to those in place forother exposures. Although this paper analyses each option in isolation, the twocomplement one another as they target different facets of risk. Positive riskweights address counterparty credit risk, whereas large exposure limits addressconcentration risk.Both policy options would, according to our analysis, lead to improved bank riskmanagement and render banks more resilient. They would equip them to betterabsorb losses: positive risk weights would require higher capital buffers andexposure limits would lead to greater diversification. Positive risk weights wouldalso improve risk transparency and correct distorted incentives for investing insovereign bonds. At the systemic level, leverage would decrease and losses inthe event of default would be more spread out. On the downside, both regulatory proposals would lower bank profitability in the short run. In the longer run,positive risk-weights could permanently reduce bank profits by increasing theirfunding costs, while exposure limits would lead to a more diversified portfolioand lower funding costs.The benefits in terms of increased resilience in the banking sector would comeat a cost for some sovereigns. Sovereign bond holdings would become morecostly in terms of capital if positive risk weights were applied or the exposureswere capped by a hard limit. In both cases, banks would try to deal with excesssovereign bonds on their balance sheets by injecting fresh capital or reducingtheir portfolio of sovereign bonds. An increased supply of sovereign paper, or alack of demand for new issues, would raise funding costs for the sovereign andconsequently for the whole economy. Furthermore, both policy options wouldlower liquidity in the sovereign debt markets, as they add to the cost and hinderthe ability of banks to provide market-making services. Exposure limits in particular would have significant repercussions on markets in the short run, as bankstraditionally have large exposures to domestic sovereigns that they would haveto shed. Other market participants would need to absorb this additional supply.Sovereigns would need to re-arrange their financing sources, which could provechallenging.Additionally, the two options could aggravate long-run macro-level cyclicaldevelopments for stressed sovereigns. During an economic downturn, anincreased riskiness of a sovereign would translate into higher risk weightsand a higher capital charge for the bank holding its debt. This would furtherworsen financing conditions for sovereigns precisely at the time when fiscalspace is most needed. Similarly, exposure limits could lead to cliff effects ina downturn, if sovereigns fail to extend their investor base. We expect thatintroducing positive risk weights would have the largest effect on stressedsovereigns, while imposing exposure limits would impact sovereigns withlarge outstanding debt volumes the most.The trade-off between strengthening the resilience of the banking sectorto sovereign risk and maintaining the investor base for European sovereignsmakes the issue of adjusting regulation particularly complex. Any policydecision needs to take into account the effects it would have on sovereignfunding conditions. In addition, as banks traditionally hold large amounts ofsovereign debt, any regulatory change could have a large initial impact withpotentially destabilising consequences. Hence, a gradual and transparenttransition would be crucial for a successful implementation of any combinationof the two alternatives.
ISBN:	978-92-95085-20-6
Tárgyszavak:	Társadalomtudományok Közgazdaságtudományok kutatási jelentés Bank regulation Sovereign risk
További szerzők:	Mevis, Dirk (közgazdász) Siklós Dóra (1984-) (közgazdász) ESM Discussion Paper Series
Internet cím:	Szerző által megadott URL DOI Intézményi repozitóriumban (DEA) tárolt változat
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