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Draghi-Backed Report Says Sovereign Debt No More a Risk-Free Bet 

March 11, 2015

Jeff Black, Bloomberg Business

Government debt can no longer be considered a risk-free asset for banks, and international regulators should consider changing the existing legislation, the European Systemic Risk Board said.

“If sovereign exposures are in fact subject to default risk, consistency with a risk-focused approach to prudential regulation and supervision requires that this default risk is taken into account,” the ESRB said in a report on Tuesday, citing the majority view among its panel of experts. “Current prudential regulation of sovereign exposures is inconsistent with the conceptual approach that underlies the existing system of regulation.”

Mario Draghi, who heads both the ESRB and the European Central Bank, is pushing for a regulatory review prompted by five years of turmoil in government debt markets that almost splintered the euro area. Lenders in the European Union can use an interpretation of the Basel III international rules on banking to avoid backing their government-bond holdings with capital, an exemption the Basel rule-makers have criticized.

The ESRB started operations in 2011 with the task of monitoring the euro area’s macro-economy and the possible buildup of imbalances that could endanger financial stability. It is hosted by the ECB in Frankfurt.

Read More: Bloomberg Business

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