BRUSSELS (MNI) – Regulators need to reconsider the zero-risk
weighting that financial institutions are allowed to assign to their
holdings of government bonds, ECB Governing Council Member Luc Coene
said Tuesday.
Current rules mean that banks don’t need to set aside any capital
to cover the risk of holding government bonds, but the sovereign debt
crisis has clearly shown that this practice needs to be reconsidered,
Coene said at conference in Brussels.
“We must make sure this issue is adequately recognized by
regulators,” he said.
Requiring banks to hold capital against their government bond
holdings “will obviously have an impact on many banks balance sheets”,
he warned.
Indeed, the bank recapitalization plan agreed at the Oct 27 EU
leaders’ summit requires Europe’s biggest banks to create a temporary
capital buffer against their sovereign debt holdings, marked to market.
According to some accounts that requirement has already led some banks
to dump sovereign Eurozone bonds and is behind some of the selloff seen
in recent weeks.
Coene spoke out against the different approaches that banks have
taken towards risk-weighted asset accounting. The differences “raise the
question whether such outcomes are consistent with what was intended by
the Basel Framework,” he said.
Coene, also governor of the National Bank of Belgium, said that the
overall effect of the numerous regulatory changes being implemented
globally and in Europe, was still unclear.
New liquidity requirements and regulatory efforts to resolve failed
banks will likely result in higher credit costs and fewer cross-border
financial institutions, he said.
Coene predicted that the role of banks in funding the European
economy would decline in importance and be more in line with the 20%
level seen in the United States.
–Brussels bureau, +324-952-28374; pkoh@marketnews.com
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