Money Supply: A vicious circle?
Regulation and sovereign debt: a vicious circle?
by Claire Jones (FT)Regulators’ fondness for sovereign debt is looking odder by the day.
The eurozone crisis and the Congressional impasse over the US debt ceiling have put paid to any notion of government bonds as risk free. What’s more, a Committee on the Global Financial System paper suggests that encouraging banks to up their holdings might in fact do more to endanger stability than promote it.
The paper, published Monday, identifies a “vicious circle between the conditions of public finances and those of banks”. As banks’ funding costs worsen, so does the creditworthiness of the sovereign, which in turn heightens funding costs. If such a vicious circle does indeed exist, then incentivising banks to hold more sovereign debt in order to fulfil regulatory requirements would only compound the problem.
And, as the charts below show, the case for its existence is compelling.
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