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Since the European debt crisis economists and politicians discuss intensively the sovereign-bank nexus. The high activity in sovereign bond issuance required to mitigate the burden of the Covid19 crisis will rather intensify this debate than calm it down. Surprisingly, however, we still have only limited knowledge about the impact of a home bias in sovereign exposure on bank stability. This paper provides a new way to use European stress test data to study this relationship. In addition, we explore the effect on a bank's probability of default if the existing capital requirement privilege for EU sovereign exposures were abolished. Our results support the conceptual idea behind the nexus theory. Interestingly, the effect of a home bias on bank stability is contingent on the home country's solvency. If the home country is sufficiently solvent, investments in home sovereign bonds may improve bank stability. The findings clearly support the benefits of additional CET1 capital buffers. Regulation focusing on the home bias should account for heterogeneous effects depending on the home country's solvency.

The current banking regulatory framework assigns EU government bonds a risk weight of zero. Since the European debt crisis, there has been increasing controversy over eliminating this equity capital privilege, which is viewed as contributing to the close relationship between state and bank risks. This report analyses the development of home bias—the tendency of major European banks to invest disproportionately high in domestic government bonds—for Germany, France, the United Kingdom, Italy, and Spain. In addition, it examines how much additional equity capital the banks of the euro area's major nations would require if equity capital privilege were eliminated. This report shows that home bias has increased over the last four years for many major European banks. Home bias only affects the additional capital requirements of Italian and Spanish banks, as their home countries have comparatively weak ratings. The estimated additional capital required if equity capital privilege were to be abolished indicates that Italian banks have the highest capital requirement at 11.5 billion euros, followed by the Spanish banks at 9.5 billion euros. Eliminating equity capital privilege would thus make it much more difficult to finance sovereign debt in Italy and Spain. Therefore, it would be advisable to introduce risk weighting for government bonds only after the EU sovereign debt levels have stabilized. At the same time, measures should be taken to make it easier for banks to reduce their home bias and better diversify their government bond portfolios.

The current banking regulatory framework assigns EU government bonds a risk weight of zero. Since the European debt crisis, there has been increasing controversy over eliminating this equity capital privilege, which is viewed as contributing to the close relationship between state and bank risks. This report analyses the development of home bias-the tendency of major European banks to invest disproportionately high in domestic government bonds-for Germany, France, the United Kingdom, Italy, and Spain. In addition, it examines how much additional equity capital the banks of the euro area's major nations would require if equity capital privilege were eliminated. This report shows that home bias has increased over the last four years for many major European banks. Home bias only affects the additional capital requirements of Italian and Spanish banks, as their home countries have comparatively weak ratings. The estimated additional capital required if equity capital privilege were to be abolished indicates that Italian banks have the highest capital requirement at 11.5 billion euros, followed by the Spanish banks at 9.5 billion euros. Eliminating equity capital privilege would thus make it much more difficult to finance sovereign debt in Italy and Spain. Therefore, it would be advisable to introduce risk weighting for government bonds only after the EU sovereign debt levels have stabilized. At the same time, measures should be taken to make it easier for banks to reduce their home bias and better diversify their government bond portfolios.

Das aktuelle Regelwerk zur Bankenregulierung erlaubt ein Risikogewicht von null für EU-Staatsanleihen. Seit der europäischen Verschuldungskrise wird verstärkt über die Aufhebung des Eigenkapitalprivilegs gestritten, weil die Nullgewichtung als ein Grund für die engen Verbindungen zwischen den Risiken von Staaten und Banken gesehen wird. Dieser Bericht analysiert die Entwicklung des Home Bias – also der Neigung der europäischen Großbanken, überproportional in Staatsanleihen des Heimatlandes zu investieren – für Deutschland, Frankreich, das Vereinigte Königreich, Italien und Spanien. Außerdem wird der potentielle Eigenkapitalbedarf für den Fall der Abschaffung der Nullgewichtung von Staatsanleihen bestimmt. Es zeigt sich, dass der Home Bias in den letzten vier Jahren bei vielen europäischen Großbanken zugenommen hat. Auf den zusätzlichen Eigenkapitalbedarf wirkt sich der Home Bias nur bei spanischen und italienischen Banken aus, da deren Heimatstaaten eine vergleichsweise schwache Ratingnote haben. Die Abschätzung des zusätzlichen Eigenkapitalbedarfs im Falle der Aufhebung des Eigenkapitalprivilegs zeigt für die italienischen Banken mit 11,5 Milliarden Euro den höchsten Kapitalbedarf an, gefolgt von den spanischen Banken mit 9,5 Milliarden Euro. Damit würde die Abschaffung des Eigenkapitalprivilegs die Finanzierung der Staatsschulden in Italien und Spanien deutlich erschweren. Es wäre daher empfehlenswert, die Risikogewichtung für Staatsanleihen erst nach der Stabilisierung der Staatsverschuldung einzuführen. Gleichzeitig sollten Maßnahmen ergriffen werden, die es den Banken erleichtern, ihren Home Bias abzubauen und ihr Staatsanleihenportfolio besser zu diversifizieren

Although banks are required to document their equity capital for loans, corporate bonds, and other receivables, they are currently exempted from the procedure when investing in government bonds: they enjoy an 'equity capital privilege.' As part of the Basel III regulatory framework redraft, the privilege may be eliminated in order to disentangle the default risks between sovereigns and banks. The present study examines how much additional equity capital the banks of the euro area's major nations would require if the equity capital privilege were eliminated. At nine billion euros, the estimates show the highest capital requirement for Italian banks. In comparison, French banks would only require additional capital of three billion euros and German banks would need just under two billion euros. Since eliminating the equity capital privilege would make the Italian state's consolidation efforts more difficult, it is advisable to risk weight newly purchased government bonds only or allow for long transition phases.

Im Rahmen der Überarbeitung des Regulierungswerkes Basel III soll das geltende Eigenkapitalprivileg abgeschafft werden, um Ausfallrisiken von Staaten und Banken zu entflechten. Aktuell müssen Banken für Kredite, Unternehmensanleihen und andere Forderungen Eigenkapital nachweisen, nicht aber für Staatsanleihen von EU-Ländern. Der vorliegende Bericht untersucht, wie viel zusätzliches Eigenkapital die Banken der größten Staaten des Euroraums benötigen würden, wenn das Eigenkapitalprivileg tatsächlich fällt. Die Abschätzung zeigt für italienische Banken mit gut neun Milliarden Euro den höchsten Kapitalbedarf. Dagegen würden die französischen Banken insgesamt nur gut drei Milliarden Euro zusätzliche Eigenmittel und die deutschen Banken knapp zwei Milliarden Euro benötigen. Da die Abschaffung des Eigenkapitalprivilegs die Konsolidierungsbemühungen des italienischen Staates erschweren würde, wäre es empfehlenswert, die Risikogewichtung für Staatsanleihen nur auf den Neukauf von Staatsanleihen anzuwenden oder lange Übergangfristen zu gewähren.

Alle drei großen Ratingagenturen Standard & Poor's, Moody's und Fitch haben Griechenland, Irland, Portugal und Spanien während der europäischen Finanzmarkt- und Staatsschuldenkrise signifikant benachteiligt. Dies lässt sich nur zu einem geringen Teil auf objektive Fundamentaldaten zurückführen. Das Reformziel der Ratingverordnung der Europäischen Union und auch des Ratinggesetzes der Großen Koalition, den Einfluss der Bonitätsbewertungen stark zu reduzieren, muss daher konsequent weiter verfolgt werden. ; The Big Three credit rating agencies put Greece, Ireland, Portugal and Spain at a significant disadvantage during the European sovereign debt crisis. Their strong influence is likely due to the importance given to credit ratings by financial regulations. Both the EU's credit rating directive and the Ratinggesetz of the German Bundestag assert that their objective is to markedly reduce this influence and allow for greater weight to be placed on fundamentals. They should pursue this objective vigorously.

In the wake of the European debt crisis, it has become clear that government bonds may actually be a risky form of investment. The Basel Committee and the Bundesbank have therefore opened an intense debate as to whether banks investing in EU government bonds should be subject to regulatory capital requirements in the future. Currently, banks do not need equity capital when investing in sovereign bonds. Waiving this exemption privilege would result in an additional Tier 1-capital requirement of 3.34 billion euros for the German banks studied here. This represents just under 1.8 percent of available Tier 1-capital. For French banks, the calculated capital requirement is 3.52 billion euros (a good 1.2 percent), while Swedish banks have a requirement of an additional 80.6 million euros (0.14 percent). Raising these funds is not likely to cause any major problems for banks in these countries. It is an entirely different matter for Greek banks, however. The capital requirement in Greece is relatively high at almost 1.8 billion euros or almost nine percent of existing Tier 1-capital. Despite its modest impact on the leverage on banks' balance sheets, a regulatory obligation to finance investments in EU government bonds with some equity capital would be very welcome. The ratio of equity to total assets would improve, at least slightly, and the reform would probably loosen up the close link between bank risks and sovereign debt in the longer term. Both would help achieving a more stable financial system within Europe.

Im Zuge der europäischen Schuldenkrise ist deutlich geworden, dass Staatsanleihen eine durchaus riskante Anlageform sein können. Der Basler Ausschuss und die Bundesbank haben daher eine intensive Diskussion darüber angestoßen, ob Investitionen der Banken in EU-Staatsanleihen in Zukunft mit regulatorischen Eigenkapitalanforderungen belegt werden sollten. Bisher müssen Banken hierfür kein Eigenkapital nachweisen. Würde dieses Freistellungsprivileg aufgehoben, ergibt sich für die untersuchten deutschen Banken ein zusätzlicher Kernkapitalbedarf von 3,34 Milliarden Euro. Das entspricht knapp 1,8 Prozent des vorhandenen Kernkapitals. Bei den französischen Banken beträgt der errechnete Kapitalbedarf 3,52 Milliarden Euro (gut 1,2 Prozent) und die schwedischen Banken haben einen Bedarf von zusätzlich 80,6 Millionen Euro (0,14 Prozent). Die Beschaffung der Mittel dürfte für Banken aus diesen Ländern kaum größere Probleme verursachen. Anders sieht es für die griechischen Banken aus. Der Kapitalbedarf ist hier mit knapp 1,8 Milliarden Euro zusätzlich und damit knapp neun Prozent des existierenden Kernkapitals vergleichsweise hoch. Trotz bescheidener Auswirkungen auf die Hebelung der Bankbilanzen wäre die regulatorische Verpflichtung, Investitionen in EU-Staatsanleihen auch mit Eigenkapital zu finanzieren, zu begrüßen. Das Verhältnis von Eigenmitteln zur Gesamtbilanz würde zumindest leicht verbessert und die Reform auf längere Sicht voraussichtlich die enge Verknüpfung von Bankrisiken und Staatsverschuldung lockern. Beides würde zu einem stabileren europäischen Finanzsystem beitragen. ; In the wake of the European debt crisis, it has become clear that government bonds may actually be a risky form of investment. The Basel Committee and the Bundesbank have therefore opened an intense debate as to whether banks investing in EU government bonds should be subject to regulatory capital requirements in the future. Currently, banks do not need equity capital when investing in sovereign bonds. Waiving this exemption privilege would result in an additional Tier 1-capital requirement of 3.34 billion euros for the German banks studied here. This represents just under 1.8 percent of available Tier 1-capital. For French banks, the calculated capital requirement is 3.52 billion euros (a good 1.2 percent), while Swedish banks have a requirement of an additional 80.6 million euros (0.14 percent). Raising these funds is not likely to cause any major problems for banks in these countries. It is an entirely different matter for Greek banks, however. The capital requirement in Greece is relatively high at almost 1.8 billion euros or almost nine percent of existing Tier 1-capital. Despite its modest impact on the leverage on banks' balance sheets, a regulatory obligation to finance investments in EU government bonds with some equity capital would be very welcome. The ratio of equity to total assets would improve, at least slightly, and the reform would probably loosen up the close link between bank risks and sovereign debt in the longer term. Both would help achieve a more stable financial system within Europe.