BRUSSELS (Reuters) - European Union finance ministers will consider five options to reduce the exposure of banks to sovereign debt when they meet next week, European officials told Reuters.
Currently, sovereign bonds are treated as risk-free and are exempt from limits imposed on bank holdings of corporate or household debt. EU countries have been cautious about changing that treatment for fear of affecting bond markets.
One option the ministers will consider is a limit on maximum exposure to a single sovereign issuer, said one official, who asked not to be named. Another is to “introduce non-zero risk weights for sovereign exposures,” the official added.
The boldest option is to impose on banks both caps and higher costs to hold sovereign bonds. Lenders could also be offered incentives to diversify their asset portfolio, the official said, adding that “banks can have zero risk weights if their portfolio of sovereign bonds is sufficiently diversified.”
“Ministers and Central Bank Governors will be invited to discuss the strengthening of the banking union with a particular focus on policy options for the regulatory treatment of sovereign exposures,” according to the agenda of the meeting of EU finance ministers in Amsterdam on April 22.
“This is the first time that EU finance ministers address this issue in a meeting,” a second EU official said.
The EU countries have been debating for months, at a technical level, whether to revise the status enjoyed by public debt. That status has held down government borrowing costs, but during the euro zone financial crisis was helped create a “doom loop” of debt dependency between states and banks.
The other two options envisage no change to existing rules or greater disclosure requirements, obliging banks to show their sovereign exposures.
Germany is the main supporter of plans to reduce exposure to sovereign debt. Italy opposes such measures because Italian banks hold huge amounts of the national public debt.
Measures to review the treatment of sovereign bonds are also under discussion in the Basel Committee, a body of banking supervisors from nearly 30 countries.
Reporting by Francesco Guarascio,; additional reporting Tom Korkemeier,; editing by Barbara Lewis, Larry King