PARIS, March 13 Sovereign bonds should in the future be weighted on banks' balance sheets according to the risks they represent, European Central Bank Executive Board member Benoit Coeure said on Thursday.
Banks are currently required under international regulations to hold government bonds as a counterweight to risks that they are exposed to.
However, the euro zone's sovereign debt crisis has raised questions about government bonds status as risk-free assets providing a solid cornerstone for banks' balance sheet.
"I would absolutely agree that in the long-term, in the steady state, it makes sense to put risk weights on all assets. That's a matter of sound incentives for risk management," Coeure told a banking conference in Paris.
"In the long-term there should be risk weights on sovereigns but then you have to think through the consequences. If you move in that direction, you may have to rethink the definition of high quality assets," he added.
Coeure said that the restructuring of some countries debt meant that sovereign debt had lost its risk-free status, creating a world where only central bank money could be considered entirely safe.
The ECB is in the midst of a vast, in-depth review of banks assets to determine how healthy they are and whether they need fresh capital to strengthen their balance sheets.
Shedding light on banks assets could trigger a revival in merger and acquisition activity in the industry, which could in turn lead to better efficiency, Coeure said.
"We would like more cross-border direct lending," he said, adding that it was not up to bank supervisors to orchestrate tie-ups in the industry. (Reporting by Leigh Thomas; Editing by Toby Chopra)