ESRB report on regulation of financial institutions' sovereign exposures in the EU
Date
10/03/2015
The European Systemic Risk Board, ESRB, has surveyed in a new report how banks' and insurance companies' sovereign exposures, i.e. their holdings of securities issues by governments, are treated in current and future financial legislation within the EU.
According to the report, these exposures receive a favourable treatment in comparison to other types of holdings. However, securities issued by governments are not always risk-free, as has recently been demonstrated by the sovereign debt crisis in Europe. The report shows that the percentage of government securities in the banks' portfolios has increased, with the main increase in the euro area countries that were under pressure during the sovereign debt crisis in 2010-2012. In particular, holdings of government securities issued by the banks' home countries have increased. This connection between banks and state comprises a potential systemic risk, as financial problems experienced by sovereigns can in this way spread to the banks and vice versa.
The report discusses a number of possible measures to counteract this potential systemic risk, including the introduction of stricter capital requirements with regard to the banks' sovereign exposures, setting limits for the banks' exposures to an individual sovereign, and enhanced disclosure requirements for these exposures. Possible measures for the insurance sector are also being discussed.
"This report is the first to take an overall approach to the difficult question of how sovereign exposures should be managed in financial regulation. It provides an important contribution to the international discussion recently initiated on this subject," comments Stefan Ingves.
