The magazine special "The Core of the Evil" focuses on a weak point in the financial system: "According to the credit risk standard approach, financial institutions do not have to apply a risk weight to government bonds issued in national currency. They are considered risk-free," it says. Ultimately, the zero weighting allows unrestricted lending without the need to hold own liability capital.
According to Wieland, the privilege of zero weighting of sovereign debt in capital adequacy requirements for banks should be abolished. The obstacle: "The regulator, i.e. the states, would increase their own financing costs," Wieland told "Bankmagazin. The German Council of Economic Experts, of which Wieland was a member from March 2013 to April 2022, had already called for many years since the financial and debt crisis, especially the European sovereign debt crisis (2010-13,) for changes in bank regulation and for banks to hold equity for public loans and government bond holdings.
The zero weighting of government bonds is problematic in terms of financial stability. "The close interconnectedness of sovereigns and banks was a key reason why the sovereign debt crisis could happen," Wieland explains. For one thing, states had to step in to bail out banks. A banking crisis can therefore lead to a sovereign debt crisis, such as in Ireland, which became virtually insolvent as a result of its bank aid and required extensive support from the member states. On the other hand, many banks, especially in highly indebted countries such as Italy, but also Spain, Portugal and Greece, had loans to the public sector and extensive holdings of government bonds on their balance sheets. An important goal is therefore to ensure that sovereign exposures are not concentrated in the hands of domestic banks, but are held by many domestic and foreign investors.
However, when introducing new requirements for risk backing with capital, Wieland considers a sufficiently long transitional period to be necessary "during which banks could restructure exposures and, in particular, reduce exposures to the country of domicile".
Bankmagazin: "Der Kern des Übels" (Issue 7/8 2023)