medium · FRM Part 2 Current Issues
In the context of 'Sovereign-Bank Doom Loops,' why does the regulatory treatment of domestic-currency sovereign debt as 'zero-risk-weighted' act as a systemic amplifier?
- It requires banks to hold much higher levels of HQLA against sovereign positions, shrinking funds available for private lending.
- It allows banks to count qualifying sovereign debt toward satisfying the NSFR requirement, even when that debt matures in under one year's time.
- It incentivizes domestic banks to load up on home-sovereign debt, concentrating their capital's sensitivity to the sovereign's credit health.
- It effectively prevents the sovereign from ever defaulting in its own domestic currency by creating a permanently captive buyer within the banking system.
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