Standard & Poor’s favours banks buying less sovereign debt

Standard & Poor’s Global Ratings (S&P) said a reduction in the amount of government debt held by banks would be a positive step towards protecting the European banking sector from future economic shocks but has warned against any excessive regulation to force the issue.

In a report on the links between European banks and sovereign debt, the rating agency - which recently hinted at a ratings upgrade for Ireland in the not-too-distant future, should Britain remain part of the EU – said if regulation indirectly pushed banks to reduce their exposure they would diversify away from investing in their home nation’s debt.

That, it added, would reduce demand for sovereign debt in general and have implications for the government bond market throughout the EU.

“We believe such diversification would be positive. It would avoid a fragmentation of financial markets along national lines and help protect banks from direct links to their sovereigns in times of stress by reducing concentration,” it said.

“However,” it added, “banks would not be immune from a default of their home sovereign, because that would likely put the domestic private sector under a significant economic stress as well.”

Regarding moves to reduce banks’ holdings of sovereign debt, S&P said EU authorities would need to “tread lightly” in order to avoid market tensions.

“Overall, we believe rethinking the regulatory treatment of sovereign exposures is reasonable – in the long run, and achievable,” it said.

Meanwhile, Nama redeemed a further €1bn in senior Irish sovereign debt, bringing the total amount to date to €25.6bn, 85% of the €30.2bn originally issued in 2010 and 2011 to acquire bank loans. Nama’s senior debt now stands at €4.6bn.