Italian and French banks revived fears of a ‘doom loop’ with the purchase of bonds


The openness of Italian and French banks to their own countries’ sovereign debt has reached record highs since the epidemic began and has raised fears about the sector’s links to increasingly indebted governments.

According to the Financial Times, based on data from the European Central Bank, domestic government securities and loans held by Eurozone banks increased by more than 140 billion a year in February.

The record hit 7 12,712 billion last August by Italian banks in contact with domestic government debt, which has risen more than 9 percent since February and has declined only slightly since then. The epidemic grew the fastest since French banks came into contact with their own government, hitting a record ১ 431 billion in September, a jump of more than 16 percent since February.

Strengthening banks’ ties to their national governments has rekindled concerns over a flaw in the European Union’s currency, which emerged a decade ago during the region’s sovereign debt crisis.

At the time, the huge internal sovereign debt exposure of banks created a “doom loop” as a vicious circle between private sector lenders and governments weakened each other and ultimately threatened the existence of a single currency.

“Sovereign risks on bank balance sheets have not yet been addressed, unlike other risk mitigation measures created by [eurozone] Banking Union, ” Dr. Hike My, a bank analyst at Deutsche Bank. “It simply came to our notice then. With the increase in debt, the current epidemic needs to be reformed. “

The region’s sovereign-bank link is back on the agenda in Brussels as the European Commission is taking a public consultation to examine possible reforms to the EU’s financial crisis management tools and bank deposit insurance structure.

Nicholas Vernon, a senior fellow at the Brugel think-tank in Brussels, said: “Increasing accountability between banks and the government is a concern for me and policymakers should focus on resolving this.” “But the risk seems to be something beyond the horizon that keeps policymakers awake these days.”

Eurozone government has issued Bonds are a record amount Last year, to fund their epidemic response, for the first time, the blockade sent over 100 percent of GDP.

But huge Bond-purchase The European Central Bank (ECB) has slashed European governments’ ever-expanding spending on borrowing from a 50 50,750 billion in grants and loans to the worst-hit countries.

Europe's doom loop shows Eurozone banks' exposure line chart rising again in domestic government debt securities and loans (to billions)

Jacques de LaRossier, former head of the IMF, said: “Banks need to respond to the issuance of bonds by the state because they feel that it is a good investment to hold on to risk and to encourage liquidity.” . And Banco France.

Banking regulations treat sovereign banks as risk-free investments for banks, allowing them to allocate zero capital against such assets. Banks have an easy “carry trade” to make money from buying government bonds by borrowing from the ECB as cheap as minus 1 percent.

Lorenzo bin Smigi, chairman of the French Banks Society Gunarel, said the regulators were motivated by high-level payers who could only buy government bonds by allowing them to resume dividend payments. “Banks can invest in safe assets mainly to maintain the capital level, seeing the message from regulators,” he added.

The final international bailout in Greece in 2015 reduced eurozone banks’ debt to their own governments, although Began to rise again After the epidemic hit a year ago – especially in Italian and French donors.

With 18 per cent of their total assets and almost double their total capital, Italian banks have much higher government debt than others in Europe.

Bank of Italy Dr. Shares of the country’s government-owned bonds, owned by foreign investors, fell 25.9 to 23.6 percent in the first six months of last year, while Italian banks raised their shares from 16.9 to 18.6 percent.

French banks ’domestic sovereign exposure is still only 4 percent of their total assets and two-thirds of their capital is below the Eurozone average.



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