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ESRB publishes report on regulatory treatment of sovereign exposures

Today the European Systemic Risk Board (ESRB) has published a report on the regulatory treatment of sovereign exposures in the books of banks and insurance corporations. These exposures have been seen by many as a source of fragility in the recent and prolonged episodes of financial stress, while others have seen them as a factor of crisis mitigation. According to the ESRB, the current regulatory framework of sovereign exposures needs to be re-examined at a global level.

The report describes the regulatory treatment of sovereign exposures in the European Union, analyses the incentives that it may create, provides data measuring those exposures and offers analytical explanations of recent developments.

The report argues that, from a macro-prudential point of view, the current regulatory framework may have led to excessive investment by financial institutions in government debt. The report recognises the difficulty in reforming the existing framework without generating potential instability in sovereign debt markets. It examines a set of possible options which may be considered, both in banking and insurance, and offers a detailed discussion of the pros and cons.

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