German finance minister Wolfgang Schaeuble believes banks are too
overloaded in the sovereign debt of their own countries.
Schaeuble also proposes such debt is not “risk free”.
Clearly Schaeuble is correct as proven by Greece and Cyprus. Differences
in bond yields also offer proof.
To mitigate risk, the Netherlands and Germany are pushing for rule
changes.. Would doing so create a different kind of risk?
European Union finance ministers split over whether to impose restrictions
on banks’ holdings of government bonds, as German Finance Minister Wolfgang
Schaeuble found scant support from skeptical colleagues for his push to
overhaul existing rules.
The Netherlands, which holds the EU’s rotating presidency, laid out five
options for tackling the risks posed by banks’ state-debt pile for the bloc’s
28 finance ministers to discuss in Amsterdam on Friday. Schaeuble backed the
Dutch initiative, while others, led by the Italian, Pier Carlo Padoan, warned
that changes could destabilize the financial system and said the issue
was too big for Europe to crack on its own.
The EU faces a tough political battle over changes to the regulatory
treatment of government bonds. The issue has become a focus of political
debate in recent months because of Germany’s insistence that the euro area
should reduce the risks banks are facing, including government debt on their
balance sheets, before creating a common deposit insurance system to round
out the so-called banking union.
Concentration Limits
The two main options on the table for dealing with sovereign bonds would
be to impose limits on the concentration of debt that banks can hold, or to
limit the current practice of treating many sovereign bonds as risk-free for
regulatory reporting.
Support for the German’s position was muted at best.
“The most preferable option is the status quo,” Padoan said, because this
wouldn’t force banks to reshuffle their debt holdings, “creating the problem
of where this debt will end up. This would provoke a readjustment shock in
the market.”
‘Massive Sell-Off’
The conversation in Basel may not go smoothly, given the resistance to
change from countries outside Europe as well as in the EU.
“It is clear that zero risk weights for all sovereign risk aren’t
realistic,” Nobuyuki Hirano, president of Mitsubishi UFJ Financial Group
Inc., said earlier this month.
Stampede Risk
In Europe, the issue is particularly important in Italy, where domestic
state debt accounts for 10.5 percent of banks’ total assets, well above the
euro-area average of 4.2 percent, according to European Central Bank data. In
France and Germany, the figures are 2.3 percent and 3.2 percent,
respectively.
Maltese Finance Minister Edward Scicluna said more study was needed on the
potential impact of changing the rules on banks’ state-debt holdings before
action is taken.
“Divesting banks so quickly from this could create a stampede,” he said.
Despite the obvious fact zero-risk weights are ridiculous, doing anything
about the problem is an “issue too big for Europe to crack on its own”.
