Bloomberg News

Europe Zero-Risk Capital Rule Should Be Ended, Lobby Group Says

February 02, 2012

Feb. 2 (Bloomberg) -- The European Union should close a loophole in bank capital rules that rates sovereign debt as risk-free and allows lenders to escape holding reserves against possible losses, the Finance Watch lobby group said.

“The existence of zero-risk weights is fundamentally flawed and misleading, as there is no such thing as risk-free assets,” said the research, published yesterday.

Losses on European sovereign debt have grown since the onset of the Euro area financial crisis that may threaten the survival of the euro. Greece is in discussions with private creditors to sign a debt-swap deal three months after private bondholders agreed to a 50 percent cut in the face value of more than 200 billion euros ($262 billion) of debt.

“Risk weights penalize non-rated exposures,” including some corporate and retail investments that have a 100 percent risk-weight attributed to them, Finance Watch said.

The Brussels-based group, whose members include labor unions and housing associations, also called for regulators to impose a so-called leverage ratio on banks that would force them to hold a minimum amount of capital against their assets without taking account of risk.

-- Editors: Jon Menon, Francis Harris

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To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net Anthony Aarons at aaarons@bloomberg.net


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