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ESRB report on sovereign bond-backed securities

The report summarises the findings of the ESRB High-Level Task Force on the feasibility and impact of creating a market for SBBS as a tool to enhance financial stability. The technical findings are based on analytical work and insights from market participants and other stakeholders. The Task Force’s report represents the outcome of these analyses and discussions. Volume I conveys the Task Force’s main findings; Volume II contains the analysis underpinning those findings

Report by the High-Level Task Force on Safe Assets
19 January 2018
Source: European Systemic Risk Board

ESRB High-Level Task Force on Safe Assets
>  Sovereign bond-backed securities: a feasibility study – Vol. I

From the foreword by Philip Lane:

In principle, the design of SBBS could facilitate the diversification and de-risking of sovereign bond portfolios without mutualising sovereign risks in Europe. To analyse the feasibility of this design, the Task Force undertook technical analysis and sought feedback from market participants. This report represents the outcome of these analyses and discussions, without necessarily reflecting individual views on all aspects.

The Task Force’s main finding is that a gradual development of a demand-led market for SBBS might be feasible under certain conditions. One necessary condition is for an SBBS-specific enabling regulation to provide the conditions for a sufficiently large investor base, including both banks and non-banks. To enhance financial stability, this regulation would need to treat the different tranches of SBBS according to their unique design and risk properties. For banks, regulating senior SBBS no more severely than sovereign bonds could incentivise them to hold these low-risk securities. The regulatory treatment of mezzanine and junior SBBS should reflect their greater riskiness.

In addition, the Task Force analysed how investor demand for SBBS would be affected by the regulatory treatment of sovereign exposures (RTSE). This analysis was conducted without prejudice to policy discussions on RTSE ongoing in other fora. If those discussions result in changes to the treatment of sovereign exposures to reflect credit or concentration risk, demand for senior SBBS would be substantially enhanced. Clearly, however, this finding does not provide sufficient justification for embarking upon such regulatory reform, which should be evaluated on its own merits.

see also article on Voxeu by Philip Lane and Sam Langfield 28.2.2018:
The feasibility of sovereign bond-backed securities for the euro area

Members of the ESRB High-Level Task Force:

Chair: Philip R. Lane (Central Bank of Ireland)
Secretary: Sam Langfield (ECB)
Assistant Secretary: Spyros Alogoskoufis (ESRB)

Members of the Plenary High-Level Task Force:
Ulrich Bindseil, Thomas Jorgensen, Massimo Rostagno and Carmelo Salleo (ECB); Alberto Giovannini and Marco Pagano (ESRB ASC); Mario Nava (European Commission); Anne Leclercq and Thomas Wieser (Economic and Financial Committee); Lars Overby (European Banking Authority); Matjaž Sušec and Rolf Strauch (European Stability Mechanism); Ewald Nowotny and Helene Schuberth (National Bank of Austria); Mathias Dewatripont, Hans Geeroms and Jean Hilgers (NBB); Kalin Hristov (National Bank of Bulgaria); Constantinos Papadopoulos (Central Bank of Cyprus); Karel Bauer (Czech National Bank); Marja Nykänen and Paavo Miettinen (Bank of Finland); Anne Le Lorier (Banque de France); Claudia Buch and Benjamin Weigert (Bundesbank); Thorsten Freihube (BaFin); Krystallo Michou (Bank of Greece); Daniel Palotai and Barnabás Virág (Central Bank of Hungary); Giorgio Gobbi (Bank of Italy); Paul Hilbers (Netherlands Bank); Jacek Osiński (National Bank of Poland); Adelaide Cavaleiro and Ana Cristina Leal (Banco de Portugal); Daniel Daianu (National Bank of Romania); Jesús Saurina (Bank of Spain); Martin Flodén (Riksbank).