Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/193581 
Year of Publication: 
2018
Series/Report no.: 
ESRB Working Paper Series No. 74
Publisher: 
European Systemic Risk Board (ESRB), European System of Financial Supervision, Frankfurt a. M.
Abstract: 
Euro area governments have committed to break the doom loop between bank risk and sovereign risk. But policymakers have not reached consensus on whether and how to reform the regulatory treatment of banks' sovereign exposures. To inform policy discussions, this paper simulates portfolio reallocations by euro area banks under scenarios for regulatory reform. Simulations highlight a tension in regulatory design between concentration and credit risk. An area-wide low-risk asset - created by pooling and tranching cross-border portfolios of government debt securities - would resolve this tension by expanding the portfolio opportunity set. Banks could therefore reinvest into an asset that has both low concentration and low credit risk.
Subjects: 
Bank regulation
sovereign risk
systemic risk
JEL: 
G01
G11
G21
G28
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-041-2
Document Type: 
Working Paper

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