Euro zone banks have significant holdings of domestic sovereign debt, inducing a close sovereign-bank nexus that endangers financial stability. We present a suggestion of how to break this nexus, which does not involve pooling and/or tranching and is fully consistent with standard Basel capital requirements. At the same time, it does not require capital provision for sovereign portfolios held as collateral for liquidity operations with the lender of last resort (LOLR). Rather, it differentiates between the purpose of collateral for LOLR liquidity operations and the individual investment decision of which sovereign debt to hold. In this way, our methodology is market-driven and can foster financial integration in Europe.
Prof. Jörg Rocholl, PhD, is president of ESMT Berlin and member of the economic advisory board of the German Federal Ministry of Finance. He is also the vice-chairman of the economic advisory board of Deutsche Welle, research professor at the Ifo Institute in Munich, Duisenberg fellow of the European Central Bank (ECB), and research member of the European Corporate Governance Institute (ECGI). Professor Rocholl graduated from the Universität Witten/Herdecke, where he earned a degree in economics (with honors). After completing his PhD at Columbia University in New York, he was named an assistant professor at the University of North Carolina at Chapel Hill. Prof. Rocholl has researched and taught at ESMT since 2007 and was appointed president of ESMT in 2011. Since 2010 he holds the “EY Chair in Governance and Compliance”.