Sir, Isabel Schnabel, a member of the German Council of Economic Experts writes about a “contentious issue: the regulation of banks’ sovereign exposures. Currently, this benefits from regulatory privileges, being exempt from capital requirements and large exposure limits. The result is high volumes of sovereign debt on banks’ balance sheets, with a strong bias towards domestic bonds… it is up to the European Commission to shift this important issue to the top of the agenda”, “
How to break the bank-sovereign doom loop”, August 29.
About time! It is now thirty years since regulators, with the Basel Accord, Basel I, introduced risk weighted capital requirements for banks; and thereto assigned risk weights of 0% to sovereigns and 100% to citizens, and so gave birth to the bank-sovereign doom loop.
It was European Authorities who assigned a 0% risk weight to Greece and thereby doomed it to its current tragedy.
If there is something the EC firsts need to come clear with, is how that happened.
When I first heard rumors about that regulatory statism, around 1997, I just did not believe it… I mean did not the Berlin wall fall in 1989?
In a letter published by FT in November 2004, soon 14 years ago, I wrote: “We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.” And of course that applies to developed nations too.
Why has this issue never really been discussed? How come the world has allowed itself to be painted into a corner with sovereign risk-weights it dares not change scared of that would on its own set off a crisis? Why did Greece have to pay for a EU mistake? Is that a way to treat a union member? And thousands of questions more.
Sir, how do we stop this “I guarantee you and you lend to me (against no capital)” incestuous relationship between sovereigns and banks?
@PerKurowski
Source:
http://teawithft.blogspot.com/2018/08/how-many-greece-will-it-take-before.html
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