Working Paper Series 30 Mar. 2020 - The effect of possible EU diversification requirements on the risk of banks’ sovereign bond portfolios
Non-technical summary
In the current Capital Requirements Regulation, special treatment is reserved for exposures of European banks to government bonds denominated in domestic currency. Banks are not required to fund with capital their investments in sovereign bonds denominated in euro, which are considered de facto riskless. Furthermore, sovereign exposures are not subject to any concentration limits and can represent a large part of banks’ capital. As a result, there are strong regulatory incentives for banks to hold disproportionate amounts of domestic sovereign debt for capital and liquidity reasons.







