24 May 2018

Association of German Banks concerned about nexus between states and banks

  • European Commission issues proposal for SBBS
  • Further fragmentation of markets feared

The European Commission has today unveiled a proposal paving the way for the securitisation of government bonds. The objective is to reduce the risks in the European banking sector arising from an excessively close link between states and banks.

Europäische Kommission

“In principle, the European Commission is right to want to break the close ties between banks and the public finances of their home country,” said Christian Ossig, Chief Executive of the Association of German Banks. The so-called bank-state nexus was one of the numerous obstacles to a true single market for financial services in Europe. “Even within the eurozone, this seriously undermines a major function of the financial markets – namely the efficient diversification of risk,” Ossig added.

“But the Commission’s proposals for sovereign bond-backed securities (SBBS) are only convincing in theory. In practice, they could even lead to further fragmentation of Europe’s capital markets,” stressed Ossig. It was open to question, for example, whether there would still be sufficient demand for non-securitised government bonds, especially those issued by more heavily indebted euro states. In times of market turbulence, moreover, the demand for the riskier SBBS tranches might collapse. There would then be a danger of “political” adjustments to the SBBS framework and the introduction of mutual liability.

Another critical issue was the regulatory treatment of the new securities. “To ensure that SBBS have a chance of establishing themselves in the market, preferential regulatory treatment is envisaged,” explained Ossig. To convince investors to accept the slightly more complex structure of an SBBS compared to that of a conventional government bond, SBBS would have to be treated even more favourably than government bonds, in Ossig’s view. That would do nothing to make the regulatory regime less complicated.

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