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Banks as buyers of last resort for government bonds?
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Banks as buyers of last resort for government bonds?

Daniel Gros
CEPS, 2017
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Editorial Rating

7

Qualities

  • Analytical
  • Overview
  • For Experts

Recommendation

A contentious issue for the completion of the euro zone’s Banking Union is the home sovereign debt that EU banks hold in amounts larger than needed to satisfy regulatory requirements, ostensibly to stabilize financial markets in a crisis. According to policy expert Daniel Gros, this practice could increase the chances of a bank’s distress sweeping through an economy. getAbstract recommends this cogent and erudite analysis to bank officers and regulators for its perceptive take on how to lower bank risk, reduce the prospect of future financial crises and help to finalize the region’s banking integration.

Take-Aways

  • Some experts believe that euro-zone banks should hold large concentrations of their sovereigns’ bonds to stabilize financial markets in the event of a financial crisis. 
  • But critics contend that this practice is instead a problem, because banks, as leveraged entities with substantial concentrations of sovereign debt, can themselves fall prey to crises and cause contagion throughout an economy. 
  • Banks are agents for private savings, and their purchases of sovereign paper do not represent incremental market demand.

About the Author

Daniel Gros is the director of the Centre for European Policy Studies. 

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