In the aftermath of the euro-area sovereign debt crisis, several commentators have questioned the favourable treatment of banks’ sovereign exposures allowed by the current prudential rules. In this paper, we assess the overall desirability of reforming these rules. We conclude that the microeconomic and macroeconomic costs of a reform could be sizeable, while the benefits are uncertain. Furthermore, we highlight considerable implementation issues. Specifically, it is widely agreed that credit ratings of sovereigns issued by rating agencies present important drawbacks, but sound alternatives still need to be found. Should a reform be implemented and a measure of sovereign creditworthiness become necessary, we argue that consideration could be given to the use of quantitative indicators of fiscal sustainability, similar to those provided by international bodies such as the IMF or the European Commission.
Marco Taboga is the Head of the Financial Markets Unit at the Economic outlook and monetary policy Department of the Bank of Italy. He is an expert in finance and mathematical and statistical methods applied to finance. He holds a Ph.D. in applied mathematics and a Master in finance from the London School of Economics and Political Science. His research on portfolio selection, interest rate modelling and equity pricing has been published in top scholarly journals, including Mathematical Finance, The Journal of Money Credit and Banking and International Finance.