The doom loop between government and banks was created by regulators.
Sir, I refer to Martin Arnold’s “Soaring public debt poised to heap pressure on eurozone, ECB warns” May 27
For the risk weighted bank capital requirements, all Eurozone sovereigns’ debts have been assigned a 0% risk weight, and this even though none of these can print euros on their own. Would there be a “doom loop” between governments and banks if banks needed to hold as much capital when lending to governments as they must hold when lending to entrepreneurs? Of course not!
In a speech titled “Regulatory and Supervisory Reform of EU Financial Institutions – What Next?” given at the Financial Stability and Integration Conference, in May 2011 Sharon Bowles, the then European Parliament’s Chair Economic and Monetary Affairs opined:
“I have frequently raised the effect of zero risk weighting for sovereign bonds within the Eurozone, and its contribution to removing market discipline by giving lower spreads than there should have been. It also created perverse incentives during the crisis.”
In March 2015 the European Systemic Risk Board (ESRB) published a report on the regulatory treatment of sovereign exposures. In the foreword we read:
Source: http://teawithft.blogspot.com/2020/05/the-doom-loop-between-government-and.html
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