DARMSTADT, Germany (Reuters) - The upcoming European bank stress tests should address banks’ holdings of sovereign debt, European Central Bank Governing Council member Jens Weidmann said on Wednesday.
The ECB will run a series of checks on banks’ balance sheets before it will take up responsibility as the euro zone’s banking supervisor late next year and Weidmann said the tests would be a success if afterwards trust returned to the sector.
“And this should also include for example that the stress test also stresses government bonds, which is currently under discussion,” Weidmann said without providing further detail for how exactly such holdings should be looked at.
Weidmann, also the head of Germany’s Bundesbank, said in a speech banks’ sovereign debt holdings should over the medium term be treated the same way as corporate bonds, which are not treated as a risk-free asset.
Currently Basel-III bank rules treat sovereign debt as a risk-free asset, which means that banks do not have to allocate extra capital to compensate for a potential loss in value.
Reporting by Eva Taylor