Sovereign Concentration Charges: A New Regime for Banks' Sovereign Exposures

November 10, 2017

Achieving the aim of Europe's banking union project, to break the vicious circle between banks and sovereigns, requires new policy initiatives. The most direct bank-sovereign linkages are national deposit insurance and concentrated domestic sovereign exposures. Thus, simultaneously with a European Deposit Insurance Scheme (EDIS) as proposed by the European Commission in 2015, the European Union should introduce regulatory disincentives against highly concentrated sovereign exposures of euro area banks. This paper makes a concrete proposal for a Sovereign Concentration Charges Regulation (SCCR), including calibration and careful transitional arrangements to avoid any disorderly market impact. The SCCR and EDIS together could realistically receive political approval in 2018 and be fully implemented within a decade.

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Acknowledgement: This material was originally published in a paper provided at the request of the Committee on Economic and Monetary Affairs of the European Parliament and commissioned by the Directorate-General for Internal Policies of the Union under the supervision of its Economic Governance Support Unit (EGOV). The opinions expressed in this document are the sole responsibility of the authors and do not necessarily represent the official position of the European Parliament. The original paper is available on the European Parliament’s webpage (http://www.europarl.europa.eu/RegData/etudes/STUD/2017/602111/IPOL_STU(2017)602111_EN.pdf). © European Union, 2017. Copyright remains with the European Union at all times.