governments swayed banks to buy their debt: ECB paper
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[July 13, 2016]
FRANKFURT (Reuters) - Stressed euro
zone governments swayed domestic banks to buy their bonds when the debt
crisis was at its height, using "moral suasion" to counter surging
borrowing costs, a research paper published by the ECB showed on
Regulators and supervisors including the European Central Bank are
trying to break a 'doom loop' of debt interdependence between lenders
and their governments, in part by making it less attractive for banks to
hold sovereign bonds.
Domestic banks have traditionally been buyers of a significant
proportion of the debt issued by governments in the currency bloc.
But the study of the purchasing patterns of 60 banks in Greece, Ireland,
Italy, Portugal and Spain between 2010-12 showed that, in months when
their governments needed to issue or roll over a large amount of paper,
they were even more likely than usual to buy than their foreign peers.
"Our estimates thus strongly and consistently suggest that collusion
between banks and sovereigns (or 'moral suasion') took place during the
sovereign debt crisis," authors Steven Ongena, Alexander Popov and
Neeltje Van Horen wrote in the study.
They said the effect was strongest for state-owned banks and, in
particular, those that had low holdings of sovereign bonds to start with
- indicating governments strategically picked the banks they chose to
The authors say such purchases can have a beneficial impact in helping
stabilize markets at a time of stress, while also reinforcing a "deadly
embrace" that heightens risks to the financial system.
That interdependence between governments and domestic banks has
diminished since the ECB introduced its quantitative easing program of
sovereign bond purchases in March 2015, which has also helped drive euro
zone borrowing costs down to record lows.
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Security features of the new 50 euro banknote are shown during it's
presentation by the German Bundesbank in Frankfurt, Germany, July
13, 2016. REUTERS/Ralph Orlowski
But regulators have been discussing proposals to further weaken the loop,
including forcing banks to hold capital against their sovereign debt holdings
and capping overall exposure to a single government.
"These regulatory reforms should enhance banks' incentives to take sovereign
risk into account...while at the same time allow banks to continue playing their
market‐maker and stabilizing roles in sovereign debt markets," the paper said.
The ECB said the views expressed in the paper do not necessarily reflect those
of the institution.
(Reporting By Francesco Canepa; editing by John Stonestreet)
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