Feasibility Check: Transition to a New Regime for Bank Sovereign Exposure?

46 Pages Posted: 1 May 2018

See all articles by Yannik Schneider

Yannik Schneider

University of Mannheim

Sascha Steffen

Frankfurt School of Finance & Management

Date Written: December 27, 2017

Abstract

Excessive sovereign debt exposures of banks contributed to the gravity of the financial and sovereign debt crisis in 2011 and 2012, as well as to the slow and asymmetric recovery of European countries. Various policies that improve banks’ resilience were introduced in recent years, however the regulatory regime for the sovereign debt exposure of banks has not changed. We identify four criteria that a new regime for bank sovereign exposures should fulfill: (1) attenuate the home bias to the domestic sovereign, (2) break the doom loop, (3) avoid a flight-to-quality of assets, and (4) mitigate risk spillovers. We assess the implications for banks’ balance sheets for five policy proposals, based on simulations on a sample of European banks. We show that none of the proposals would fulfill all four criteria in the absence of a safe asset. We conclude that a new regime for bank sovereign exposure should be conditional on restoring the value of sovereign bonds as a safe asset.

Note: Provided in the context of Economic Dialogues with the President of the Eurogroup in ECON.

Keywords: sovereign bonds, banks, safe assets, regulation

JEL Classification: G01, G21, G28, G14, G15, F23

Suggested Citation

Schneider, Yannik and Steffen, Sascha, Feasibility Check: Transition to a New Regime for Bank Sovereign Exposure? (December 27, 2017). Available at SSRN: https://ssrn.com/abstract=3093508 or http://dx.doi.org/10.2139/ssrn.3093508

Yannik Schneider

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Sascha Steffen (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee
32-34
Frankfurt, 60322
Germany
16097326929 (Phone)

HOME PAGE: http://www.sascha-steffen.de

Register to save articles to
your library

Register

Paper statistics

Downloads
22
Abstract Views
182
PlumX Metrics