Josef Korte, Sascha Steffen, 07 September 2014

European banking regulation assigns a risk weight of zero to sovereign debt issued by EU member countries, making it an attractive investment for European banks. This column defines a ‘sovereign subsidy’ as a new measure quantifying to what extent banks are undercapitalised due to the zero risk weights. Using recent sovereign debt exposure data, the authors describe the build-up of this subsidy for both domestic and cross-country exposures.  

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