The European Union is considering limiting the purchase of government bonds by banks.
The measure is hypothesized to reduce the risks linked to the exposure of institutions to their own country. The topic is at the center of the discussion on the reform of the Banking Union. The Italian government is already alarmed.
Ceiling on government bonds, what Brussels wants to do
The European Commission will present the final version of the proposal by March, while the European Parliament has started working on the amendments.
For Italy, where public debt represents an important component of the financial market, the risk is that new restrictions reduce the participation of institutions in Treasury auctions.
The orientation of the European Commission is to address the problem of the concentration of bank exposures towards national sovereign debts, encouraging greater diversification of investments. The concern is that a bank that is too exposed to its country’s government bonds could suffer significant consequences if the government experiences financial difficulties.
The hypothesis discussed provides that, above a certain threshold, government bonds held by banks are subjected to a risk weighting, with consequent greater capital provisions. These securities are currently generally considered zero risk for prudential purposes.
The introduction of new requirements could therefore change the convenience for institutions to hold large quantities of sovereign debt.
The risks
If demand were to decline as the state continued to place debt on the market, investors could demand higher yields to purchase new issues. In this scenario, the cost of public financing could increase.
Warning: this is not a certainty but only a potential risk. Everything would depend on the limits actually introduced, on the application times of the new rules and on the response of other investors.
The rise in yields can impact public finances through the cost of new issues and, at the same time, influence the market value of securities already present in bank portfolios.
Banking Union in the EU
The issue of sovereign bonds is part of the European Banking Union, a project aimed at reducing the fragmentation of the financial system. The EU aims for a more integrated banking market, limiting the dependence of institutions on the conditions of their country of origin.
Also on the table is the hypothesis of common guarantees for the management of banking crises and the protection of users through national funds.
On the issue of the concentration of banks’ exposures on sovereign bonds, Giovanni Crosetto, FdI MEP and deputy ECR coordinator in the Econ commission, expresses concern, cited by Sun 24 Hours:
We are concerned because it was included in the Commission Communication, which explicitly said that it intends to address the issue. In the parliamentary document, through an amendment that I presented in recent days, we try to give a series of reasons as to why this is not the historical moment to intervene and why this sovereign risk does not persist.
The explanation:
The Commission’s orientation would be to introduce a ceiling on the holding of sovereign debt securities for banks, beyond which the government securities held would be “weighted” and further capital provisions would have to be made. If this happened, it could lead to banks no longer participating in government bond auctions. The implications would be important precisely at a time when attempts are being made to improve the circulation of capital in Europe.
