Basel plan to curb banks’ sovereign debt faces challenges

Author: Gemma Varriale | Published: 3 Feb 2015

Global banking watchdogs are gearing up to review a controversial rule that allows banks to hold little or no capital against their government debt holdings.

Current EU rules state that banks, under so-called risk-weighting, can rate all debt issued by the bloc’s 28 member states as risk-free. This means they don’t have to put aside capital against debt held in their own currency.

The Basel Committee for Banking Supervision’s so-called zero-risk weighting rule came under fire during the eurozone debt crisis, when several countries had to be bailed out and the differing risk profiles of different countries’ debt became apparent.

But despite the regulatory will to close the loophole, the plan could take years to come to fruition, and will have to overcome significant political hurdles to do so.

Bank regulators have been trying to change this rule since 2006, said Simon Gleeson, a London-based partner with...