Easier Said than Done? Reforming the Prudential Treatment of Banks’ Sovereign Exposures

47 Pages Posted: 30 Apr 2016

Date Written: April 14, 2016

Abstract

In the aftermath of the euro-area sovereign debt crisis, several commentators have questioned the favourable treatment of banks’ sovereign exposures allowed by the current prudential rules. In this paper, we assess the overall desirability of reforming these rules. We conclude that the microeconomic and macroeconomic costs of a reform could be sizeable, while the benefits are uncertain. Furthermore, we highlight considerable implementation issues. Specifically, it is widely agreed that credit ratings of sovereigns issued by rating agencies present important drawbacks, but sound alternatives still need to be found; we argue that consideration could be given to the use of quantitative indicators of fiscal sustainability, similar to those provided by international bodies such as the IMF or the European Commission.

Keywords: sovereign risk, prudential regulation, sustainability of public finances

JEL Classification: E580, G210, G280, H630

Suggested Citation

Lanotte, Michele and Manzelli, Giacomo and Rinaldi, Anna Maria and Taboga, Marco and Tommasino, Pietro, Easier Said than Done? Reforming the Prudential Treatment of Banks’ Sovereign Exposures (April 14, 2016). Bank of Italy Occasional Paper No. 326. Available at SSRN: https://ssrn.com/abstract=2772541 or http://dx.doi.org/10.2139/ssrn.2772541

Michele Lanotte

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Giacomo Manzelli

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Anna Maria Rinaldi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Marco Taboga

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Pietro Tommasino (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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