The European Sovereign-Debt Crisis

Recent scholarship has underscored the possibility that capital-adequacy regulations may have contributed to the 2008 financial crisis by privileging highly rated asset-backed securities, such as mortgage-backed securities. The same regulations gave an even more privileged position to sovereign debt, leading to the question of whether they helped cause the European sovereign-debt crisis. There is little question that the regulations encouraged European banks to invest in European governments' bonds, but it does not appear that this encouragement led to more government borrowing by significantly reducing the yield governments needed to pay on their debt. However, it does appear that capital-adequacy regulations—along with post-2008 liquidity regulations—concentrated sovereign risk in the European banking system, aggravating the sovereign-debt problem by requiring government bailouts that, in turn, required the issuance of more sovereign debt, further jeopardizing the governments' fiscal position and banks' solvency. Exacerbating the situation, in the midst of a panic, the European Banking Authority imposed new capital requirements on banks and effectively forced them to realize mark-to-market losses on sovereign exposures

Business · Capital adequacy ratio · Capital requirement · Debt · Debt levels and flows · Economic policy · Economics · European debt crisis · European integration · European union · Financial system · Internal debt · Market economy · Market liquidity · Political science · Position (finance · Senior debt · Solvency · Sovereignty · Banking stability, regulation, efficiency · Credit Risk and Financial Regulations · Global Financial Crisis and Policies · Law · Finance

• Centralization of rule-making versus embeddedness in the Eurozone

  Maja Savevska•Journal of Contemporary European…•2020

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