Halister News

(Bloomberg) -- Encouraging EMU banks to gradually converge toward a shared bond benchmark allocation is an option worth exploring in the absence of a common euro bond, Goldman Sachs analyst Francesco Garzarelli writes in client note ahead of this week’s ECOFIN meeting on the banking union.

• Policy makers could consider a number of alternatives to the current zero-risk weighting, including asking for a greater disclosure of holdings, the introduction of non-zero RWAs, a cap on exposure to a single issuer and a system of penalties and incentives to encourage greater diversification
• Suggests a mix of suasion and economic incentives to diversify govt bond holdings toward a capital key-weighted benchmark, would reduce “home bias” in both core and peripheral countries
  • A more regular and granular disclosure of sovereign holdings, particularly for institutions falling outside the EBA stress test, would also encourage market discipline
• While the topic is up for discussion at this week’s ECOFIN meeting, doesn’t expect imminent changes
• Using ECB data, says overall exposure to the sovereign is 18.3% of total assets for Italian banks and 13.4% for Spain’s vs 9.3% for the euro area as a whole
  • Lion’s share of the exposure is toward bonds issued by the domestic sovereign
• NOTE: Bernstein analysts say Italy, Spain banks would be hit by a sovereign exposure cap; a Bank of Italy study shows the costs of reform could be sizable, while the benefits are uncertain