On December 7, 2017, the Basel Committee on Banking Standards published a discussion paper on the regulatory treatment of sovereign exposures. The discussion paper sets out the issues raised by the Task Force on Sovereign Exposures, which the Basel Committee set up in 2015, and presents potential ideas for addressing those issues. The Basel Committee's view is that all sovereign exposures entail risk but they also play an important role in the banking system, financial markets and broader economy. The suggestions presented in the discussion paper seek to balance the prudential risks with the Basel Committee's mandate to enhance financial stability.
The Basel Committee presents its views on how the framework for the regulatory treatment of sovereign exposures might be changed. The discussion paper sets out possible revisions to the definition of sovereign entities to enhance consistency across jurisdictions. The Basel Committee is considering how the internal ratings-based approach might be removed for sovereign exposures as well as revising the standardized risk weights for sovereign exposures held in both the banking and trading book, including removing national discretions to apply a preferential risk weight for certain sovereign exposures. It also considers adjustments to the credit risk mitigation framework, including removing the national discretion to set a zero haircut for certain sovereign repo-type transactions.
The Basel Committee is also assessing how the potential risks of excessive holdings of sovereign exposures might be mitigated, such as through marginal risk weight add-ons based on the degree of a bank's exposure to a sovereign. The Basel Committee also considers how guidance on the Pillar 2 (supervisory review process) might be introduced for monitoring and stress testing for sovereign risk and for supervisory responses to mitigating sovereign risk. Lastly, the Basel Committee discusses the disclosure requirements under Pillar 3 in regard to sovereign risk.
Comments on the discussion paper should be provided by March 9, 2018. The Basel Committee has not yet decided whether to make any changes to the treatment of sovereign exposures and will assess its next steps based on the feedback.
The discussion paper is available at: https://www.bis.org/bcbs/publ/d425.pdf .
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