Het veranderend risicoprofiel van staatsschuld in de EMU.implicaties voor het bankentoezicht

This paper examines the vulnerability of banks in EMU countries to shocks to default risk premiums on public debt. This vulnerability depends on (1) the total amount of public debt in bank portfolios, (2) the diversifiability of the default risk on public debt of EMU members, and (3) the degree of actual geographical diversification of public debt holdings by banks. We simulate the effect of country-specific default shocks 0n the market value of public debt held by banks. We compare two scenarios. First, we calculate the effect on the standard deviation of the equity-to-assets ratio if banks continue to hold mainly domestic public debt. Next, we calculate this effect if banks diversify their investments in public debt across EMU governments. We find that the standard deviation of the equity-to-assets ratio declines considerably if banks diversify their public debt holdings. We close with some implications for prudentia1 regulation.