Sovereign Concentration Charges: A New Regime for Banks’ Sovereign Exposures

09-11-2017

Achieving the aim of Europe’s banking union project, to break the vicious circle between banks and sovereigns, requires new policy initiatives. The most direct bank-sovereign linkages are national deposit insurance and concentrated domestic sovereign exposures. Thus, simultaneously with a European Deposit Insurance Scheme (EDIS) as proposed by the European Commission in 2015, the European Union should introduce regulatory disincentives against highly concentrated sovereign exposures of euro area banks. This paper makes a concrete proposal for a Sovereign Concentration Charges Regulation (SCCR), including calibration and careful transitional arrangements to avoid any disorderly market impact. The SCCR and EDIS together could realistically receive political approval in 2018 and be fully implemented within a decade.

Achieving the aim of Europe’s banking union project, to break the vicious circle between banks and sovereigns, requires new policy initiatives. The most direct bank-sovereign linkages are national deposit insurance and concentrated domestic sovereign exposures. Thus, simultaneously with a European Deposit Insurance Scheme (EDIS) as proposed by the European Commission in 2015, the European Union should introduce regulatory disincentives against highly concentrated sovereign exposures of euro area banks. This paper makes a concrete proposal for a Sovereign Concentration Charges Regulation (SCCR), including calibration and careful transitional arrangements to avoid any disorderly market impact. The SCCR and EDIS together could realistically receive political approval in 2018 and be fully implemented within a decade.

External author

N.Veron, Bruegel