Rules on sovereign debt are proving an obstacle to European banking union
analogy popular in Brussels, the euro zone is a house that needs fixing. Everyone frets about its ability to withstand a gale. But the builders are nowhere in sight. The owners cannot agree on the repairs that are needed, much less on how to do them. When Olaf Scholz, Germany’s finance minister, cautiously accepted the idea of a common deposit-insurance scheme on November 5th, that removed one point of contention.
New rules could take two forms. Banks could be forced to increase their capital buffers if their holdings of any particular security exceed a certain threshold—a “concentration charge”. Or they could be forced to back their holdings of risky sovereign debt with extra capital by increasing the risk score—known as the risk weight—attached to some sovereign bonds, which all regulators now treat as risk-free.
This would have significant effects on banks—and not just in Italy. Nicolas Véron of Bruegel, a think-tank, points out that Germany has some of the most concentrated exposures to government debt: the public-sector Landesbanks are big creditors of local governments.
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