Threat to prized risk-free status of sovereign bonds

THERE is growing support among international regulators for ditching the prized “risk-free” status of sovereign bonds, a senior UK regulator has told banks in a private briefing.

The FSA’s Paul Sharma, head of its prudential policy division, updated banks last month on talks over the details of the Basel III capital regime.

He said many members of the Basel Committee are becoming convinced that giving sovereign bonds automatic “risk-free” status – meaning that banks have to put aside minimal reserves against them – is no longer appropriate, given the Eurozone debt crisis.

But if the committee decides to ditch sovereigns’ special status, it will put Basel on a collision course with EU politicians, who are trying desperately to make banks buy more public debt.

Sharma added that there is strong support for loosening liquidity rules to let covered bonds count as liquid assets ­– which the UK opposes – and, in a move that would further erode the status of sovereigns, ditching the required 60/40 ratio of sovereign bonds to other assets in banks’ liquidity buffers.

The FSA declined to comment.