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.
Michele Lanotte is currently a senior policy officer in the Bank of Italy. He has been the representative of Banca d’Italia in a number of international working groups dealing with the prudential regulation and supervision issues at the EBA, CEBS, European Commission and the Basel Committee for Banking Supervision. His interests concern prudential regulation and his main responsibilities covers the formulation of regulations for banks and investment firms in the areas of capital adequacy, credit risk and securitisations.
In February 2009 he was seconded to the Directorate General for Competition of the European Commission in Bruxelles where he joined the Task Force on Financial Crisis and spent three years with the team in charge of assessing the State aid measures granted by the European jurisdictions at the height of the global financial crisis. In August 2012 he was seconded in Directorate General for Internal Market and Financial Services for one year and jointed the “Banking and financial conglomerate Unit” which is responsible for developing the prudential regulation framework at European Level including the macro-prudential framework.
Michele currently represents the Bank of Italy on the Basel Committee’s Task Force on Standardized approach. At European level Michele is also a member of the: i) European Commission’s Expert group on banks; ii) EBA’s sub-group on credit risk.
Michele holds a degree in Economics from the University of Rome, Italy and a specialization school from University of Bari, Italy.