No. 5 - Large-country bias and the limits on sovereign concentration risk

With a view to loosening the link between sovereigns’ and banks’ creditworthiness, some suggest that large-exposure limits be introduced on banks’ holdings of sovereign debt. However, this proposal has several drawbacks.

In particular, the enforcement of a single threshold for all sovereign bonds, without regard to the size of the country’s economy, might lead to a negative home bias for banks from large countries.