Debt Overload

ECB’s Nouy: Government debt isn't risk-free

Danièle Nouy wants banks to stop buying their own government's debt.
  • Why it matters

    Why it matters

    Restricting banks’ holdings of state debt could have a massive impact on the European bond market. Most banks would be forced to sell off government debt from their own country and exchange it for new debt.

  • Facts


    • Danièle Nouy says no bank should be allowed to hold debt totaling more than 25 percent of the capital they hold in reserve.
    • Such a move could require as much as 40 percent of the European government debt to change hands, according to one estimate.
    • Ms. Nouy has been in charge of supervising the largest European banks since the European Central Bank took charge of European supervision in November 2014.
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Europe’s top banking supervisor has said that European banks should no longer consider government debt to be risk-free and urged limits on the amount each bank can lend to individual countries.

In an exclusive interview with Handelsblatt, Danièle Nouy, who heads the supervisory arm of the European Central Bank,  argued the same rules should apply to government debt as for other assets, such as mortgages, that are held by a bank. In particular she called for a ceiling on how much government debt any bank can hold from its own country.

“First and foremost, we need to acknowledge that government bonds are not risk-free,” Ms. Nouy said. “Large exposure limits should apply to government bonds, as is the case for all other loans. Banks should not lend any one debtor more than one quarter of their equity capital. That would also be a sensible order of magnitude for government bonds.”

Ms. Nouy’s proposal would amount to one of the most drastic changes in how European banks are regulated in the wake of the 2008 financial crisis, breaking what has been seen as a dangerous liaison between banks and governments, and forcing the bond market in Europe to become much more integrated. Government debt has long been considered a risk-free exception to the balance sheets of any bank, an exception that has been at the behest of politicians and allowed many banks to buy unlimited amounts of their own country’s debt.

“This is primarily about recognizing that government debt is not risk free. There should be a large loan ceiling for sovereign bonds, just like for any other type of credit.”

Danièle Nouy, Chief Supervisor, European Central Bank

Despite the euro zone’s debt crisis since 2009, many governments in Europe are still heavily indebted to their own national banks. The National Bank of Greece, for example, at the end of 2013, held about twice as many Greek bonds on their balance sheets as their total capital reserves.

The consequences of such a move as Ms. Nouy suggested could be enormous. Martin Hellwig, director of the Max Planck Institute, estimates that such a ceiling on debt holdings would mean that some €720 billion, or 40 percent of all euro zone government bonds, would have to change hands between banks for the criteria to be met.

Ms. Nouy, who has been in charge of European supervision for a total of five months, became the most significant advocate yet in a debate that has been gathering steam in Europe for a number of months. Germany’s Bundesbank has long supported a move to classify even state debt as risky, as has the German government in Berlin. One Berlin government official told Handelsblatt that a large loan ceiling would mark a “good step” towards forcing banks to set aside capital for government bonds.

Ms. Nouy can’t change the rules on her own. A reform would require new European legislation, and has been resisted especially by southern European nations.

But Ms. Nouy said she believes a plan along her lines has the backing of the European Parliament. The risk-weighting of government bonds has also been discussed internationally during so-called “Basel III” talks aimed at reaching common global standards. The Berlin source said Germany would support a gradual and long-term adjustment in banks’ bond holdings.

“We are moving step by step in this direction,” Ms. Nouy said.

German banks would need to make adjustments too. About one third of Deutsche Bank’s government bond holdings are in German bunds – nearly 50 percent of their capital reserves.


The full interview with Danièle Nouy will appear in Wednesday’s issue of the Handelsblatt Global Edition.

Daniel Schäfer heads Handelsblatt’s finance section out of Frankfurt. Yasmin Osman leads coverage of banking supervision issues for Handelsblatt in Frankfurt. Christopher Cermak of the Handelsblatt Global Edition contributed to this story. To contact the authors: and 


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