Can European Banks Keep Buying Government Bonds?
A review of balance sheets shows that European banks are carrying more government debt than in years past, the Wall Street Journal reports. Sovereign debt comprised 5.6 percent of the assets of banks in the eurozone at the end of this August, up from 4.2 percent at the end of 2011. This means that, as government have issued additional bonds, some of the larger holders of the debt have become European banks.
There are a whole host of complex factors that can explain the increase, but two of the primary reasons are quite simple. First, new regulations have encouraged banks to hold government debt because it is treated as a risk-free asset.
Reforms to the banking system have created very specific amounts of cash that banks have to carry in order to offset assets with different risk levels, as well as ratios of riskiness that banks must abide by between their different levels of assets. Holding government debt makes it much easier for banks to abide by the rules, allowing them to carry less cash on hand and maintain more of their other, nominally riskier activities.