The world's central banks recently signed off on the Basel III rules for bank capital...One of the most important concerns the treatment of sovereign bonds on banks' balance sheets.
Banks that hold large, concentrated portfolios of their own governments' bonds can be a threat to financial stability. This practice needs to be discouraged. Unfortunately, the Basel Committee decided, for now, not to act.
National regulators can choose to treat government bonds denominated in domestic currency as safe -- and they do. All the committee members use this freedom to set the risk weight on such bonds at zero.
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