Regulatory Treatment of Sovereign Exposures and Safe Assets Academy

Euro area governments have committed to break the doom loop between bank risk and sovereign risk. But policymakers disagree on how to treat sovereign exposures in bank regulation and whether and how to design a common safe asset. The objective of this course is to review the economics underpinning these contentious policy debates. This course will begin by recounting the history of the euro area sovereign debt crisis and reviewing theories that account for the role of the banking sector. Attention will then turn to recent trends in banks’ holdings of sovereign debt securities in view of current regulation. Through this lens, we will provide a framework for evaluating ideas to reform regulation, both in terms of prudential treatment and a possible common safe asset.