The ECB's QE: Time to Break the Doom Loop between Banks and Their Governments

CEPS Policy Brief, No. 328, March 2015

13 Pages Posted: 28 May 2015

See all articles by Willem De Groen

Willem De Groen

Centre for European Policy Studies (CEPS)

Date Written: March 13, 2015

Abstract

The recent crises have shown that the eurozone countries’ government debt is not immune to default. Applying a large-exposure requirement also to eurozone government debt would be a logical measure towards breaking the bank-government doom loop, given the low probability and high loss-given government default. But what would be the impact of the application of the large-exposure requirement on the banking sector as well as on government funding? This CEPS Policy Brief presents the results of a simulation exercise performed for 109 systemic banks in the eurozone, showing that their eurozone government debt portfolios would have to decrease by 3.2% or €63 billion, if a 50% of own-funds cap would be applied on large exposures. The eurozone central banks’ demand for sovereign bonds under the extended asset purchase programme further creates momentum to start gradually implementing the restriction.

Keywords: eurozone, banks, eurozone government debt, banking sector

Suggested Citation

De Groen, Willem, The ECB's QE: Time to Break the Doom Loop between Banks and Their Governments (March 13, 2015). CEPS Policy Brief, No. 328, March 2015. Available at SSRN: https://ssrn.com/abstract=2611059

Willem De Groen (Contact Author)

Centre for European Policy Studies (CEPS) ( email )

1 Place du Congres, 1000
Brussels, 1000
Belgium

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