Halister News

(Bloomberg) -- Regime shift of applying risk weights and/or large exposure limits on EGBs is worth between +30bps and +50bps in 10Y BTPs, Citigroup strategists including Micheal Spies write in client note.

• On the flow effect of regulations, under the most severe regulatory scenario, flat risk weights of 5% can lead to an uptick of EGB yields by nearly 4bps while the implementation of Basel-proposed risk weights could lead to an increase of up to 40bps
• 25% large exposure limit under the most rigorous capital assumptions could lead to EGB re-allocation of more than EU1t
  • Imposing risk weights and/or large exposure limits fundamentally changes the nature of semi-core and especially peripheral EGBs
  • These instruments become more risky because of lower home bias but also because the ability to restructure debts becomes feasible
  • Regime shift takes these bonds away from true sovereign status toward sub-sovereign or external debt-risk valuations
• European policymakers are still in the early stages of tackling the thorny topic of risk weights and large exposure limits for sovereign debt