ECB To Toughen Sovereign Bond Requirements

A top official at the European Central Bank has signaled it will try to force euro zone banks to hold capital against sovereign bonds, in an attempt to stop weak lenders using its cash to hoover up the debts of crisis-hit countries.
In an interview with the Financial Times, Peter Praet, an ECB executive board member, outlined how the central bank could combine its new powers as chief banking regulator with its existing role as currency issuer to toughen up the requirements on sovereign bonds, which have traditionally been classed as risk-free.

The central bank will try to bring about the change in regulatory thinking using its health check of the euro zone’s 130 biggest lenders alongside any new offer of cheap long-term liquidity.

Mr Praet said if sovereign bonds were treated “according to the risk that they pose to banks’ capital” during the health check, then lenders would be less likely to use central bank liquidity to buy yet more government debt.

via ECB poised to get tough on sovereign bond risks

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