End zero risk weights for government bonds, says Bundesbank’s Dombret
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End zero risk weights for government bonds, says Bundesbank’s Dombret

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Bundesbank board member warns that the technological complexity of banks is a problem and reminds the world that government bonds are not risk-free

Andreas Dombret, the Bundesbank executive board member, has said the last stages of solving the ‘too big to fail’ problem are now in sight, so taxpayers no longer bear such heavy risk from bank failures. But he warned that banks’ technological complexity posed new threats.

“We are now more than seven years after the failure of Lehman Brothers,” Dombret said, “and we still have one important piece of work to finish, which is addressing the too big to fail issue — that refers to the total loss-absorbing capacity of banks in a gone concern situation. I’m hopeful that in the summit in Antalya the leaders will decide on implementing such a standard, which would make the system even more safe and help us solve the too big to fail (TBTF) issue.”

Dombret, who has long argued for tackling the TBTF problem, said: “We shouldn’t trick ourselves: should several very large banks actually fail, we would still have a big problem. But we need mechanisms to address such potential failures.”

He hailed the progress in Europe, with banks building up tier one capital buffers, the establishment of the Single Supervisory Mechanism by the European Central Bank, and the Single Resolution Mechanism (SSM), which will begin in January.

Though Dombret said such a young system could not be perfect, he said: “From a German perspective, we are rather pleased with the progress. We are in a safer place.”

Asked whether it would only be clear that the system worked when it was tested by a bank failure, he said: “I am not looking for tests. They’ll come eventually and probably from directions where you expect it least. One of the areas we are looking at in the SSM is the risk of cyber attacks and technological challenges, which are very difficult from a supervisory point of view to judge. Banking has become so complex: we have to look at ever so many angles.”

But the chance of the system falling apart was lower than in the past, he said.

However, Dombret said the fact that sovereign bonds were still treated as riskless needed addressing, as there was still a risk of mutual contagion between banks and governments, as happened during Europe’s financial crisis.

“Government debt is not risk-free, and there are differentiations in risk levels,” he said. “This nexus, especially in a monetary union, is something you need to consider.”

As well as raising sovereign risk weightings from zero, Dombret recommended capping banks’ exposures to any one sovereign.

On European quantitative easing, Dombret said he was “not the biggest fan of it” but that “we are on track with the decisions made” by the ECB.

It was having some of the desired effects, such as stimulating inflation, he said, but also carried risks. “You decrease the incentives for governments to do structural reforms which are needed to increase competitiveness,” he said.



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