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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?

CEPS,

5 min read
5 take-aways
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European banks hold sovereign debt ostensibly to steady markets, but that may destabilize the banks.

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7

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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.

Summary

Many banks in the European Union own significant amounts of their home country’s bonds, keeping with the view of experts who argue that such holdings can act as “shock absorbers” to help stabilize financial markets in the event of a 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.

If banks were to no longer hold such large concentrations of bonds, it would not affect ...

About the Author

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

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