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 higher levels of HQLA against sovereign positions, reducing the funds available for private-sector lending.
- It allows banks to use sovereign debt to satisfy the NSFR, even if the debt has a maturity of less than one year.
- It incentivizes domestic banks to load up on home-sovereign debt, concentrating their capital's sensitivity to the sovereign's credit health.
- It prevents the sovereign from defaulting in its own currency by creating a 'captive' buyer in the banking system.
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