A top official at the European Central Bank has signalled it will try to force eurozone 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.
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.
- The vicious cycle that has seen banks use central bank cash to buy government bonds has been partly blamed for prolonging the eurozone financial crisis.
- Praet said that credit conditions remain “quite normal” for this stage in the economic recovery
- But there was a risk the tests could lead to a further contraction in lending
- He said monetary policy would be used “without hesitation” if the ECB’s data on money and credit showed banks were continuing to shrink their loan books.
- The ECB would ensure any liquidity was used to spur lending to the real economy by attaching tougher requirements to banks’ holdings of sovereign debt
More detail at the Financial Times (gated – try a search of Google news using the headline, or can be read with a free registration) : ECB poised to get tough on sovereign bond risks
h/t @ChrisWeston
