A paradigm shift on sovereign risk

Opinions changing on capital treatment of government bonds

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The European Systemic Risk Board published in March a report drawing attention to the treatment of sovereign risk in the risk models of financial institutions. The report examines whether favourable treatment of government debt under existing and incoming regulation (including Solvency II), incentivises firms to build sovereign exposures that could ultimately constitute a systemic risk.

Based on a relatively crude analysis, it estimates for insurers that solvency capital requirements would

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