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Basel says sovereign debt bank capital change could take years
May 17, 2016 / 6:51 AM / in a year

Basel says sovereign debt bank capital change could take years

Stefan Ingves in Stockholm, Sweden February 11, 2016. REUTERS/Thommy Tengborg/

LONDON (Reuters) - Forcing banks to hold capital against holdings of their own government’s debt would take years to agree and implement, a top international regulator told the Reuters Regulation Summit.

Some policymakers have criticized global banking rules that treat banks’ sovereign debt holdings as “risk free”, meaning no capital is needed to insure against default.

A sharp deterioration in Greek, Irish, Portuguese and Spanish government bonds during the euro zone debt crisis showed that “risk free” sovereign debt can feed a “doom loop” to drag down lenders, critics have said.

The rules were written by the Basel Committee of banking supervisors from the world’s main financial centers, which is studying whether changes are needed.

The issue is politically sensitive in the euro zone as banks in countries where public coffers are under strain could switch to holding debt of healthier countries to ease the capital burden.

“If it works out according to plan, we will put out a paper in one form or another for consultation towards the end of the year,” Basel Committee Chairman Stefan Ingves told the Reuters summit.

The consultation would take several months, followed by reflection, he said.

Basel is already implementing several major reforms between now and 2019, many of which are being phased in gradually to give banks time to adjust.

“It’s hard to tell, but if you use these other projects as examples then implementing any changes to the global rules for how to treat sovereign exposures would take a number of years,” said Ingves, who is also governor of Sweden’s central bank.

“First you need to get agreement on what to do and that takes quite a lot of work. Then you need to agree on definitions and reporting, and then you actually have to agree on when to implement things and that usually takes a while,” Ingves said.

The Group of 20 economies (G20), which applies Basel’s rules, agreed earlier this year that further Basel reforms should not significantly add to banks’ capital burden.

EU financial services chief Jonathan Hill has said he won’t propose changes to the bloc’s bank capital rules on “risk-free” sovereign debt until there is agreement in Basel.

Instead, EU states may limit how much sovereign debt banks can hold as an interim measure.

Bank of England Deputy Governor Andrew Bailey told the Reuters Summit he expects the risk-free rule to be changed, but over time.

“My best guess is that over time a regime change will occur. For the moment we have tools to manage it at the domestic level. It’s not going to move that quickly,” Bailey said.

Reporting by Huw Jones, editing by Louise Heavens

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