The vice president of Germany's Bundesbank proposed setting limits over the medium term for how much banks can lend to governments and backing such exposures with adequate capital to make them less reliant on taxpayers' help in crisis times.
Sabine Lautenschlaeger who is also a member of the Basel Committee on Banking Supervision which wrote the new global banking standards known as Basel III, told Reuters that current regulation was setting the wrong incentives.
Continue Reading Below
During the debt crisis, banks especially in troubled euro zone countries like Spain and Italy increasingly bought government debt and under Basel III they don't have to set capital aside to counter possible default risks.
"In the medium term for sovereign debt, there should be limits for overall exposure and capital should be required, which adequately reflects the risk," Lautenschlaeger said. "Regulation so far is setting the wrong incentives."
"But it has to be done with caution, for example with transition periods, because credit institutions and states need time to adjust," she added. "In the end, such a step would strengthen banks' resilience and thereby markets' confidence."
Lautenschlaeger added that such plans were not yet being discussed in greater detail by the Basel Committee.
(Reporting by Eva Kuehnen and Alexander Huebner)