Policy makers should act to minimize the impact of sovereign credit risk on banks to safeguard their access to funds, the Bank for International Settlements said.
“The financial crisis and economic recession, and policy makers’ responses to these events, have raised sovereign credit risk concerns in a number of advanced economies,” the Switzerland-based BIS said in a Quarterly Review released Sunday. “This has increased the cost and reduced the stability of funding for banks.”
Risk could be reduced by ensuring sound public finances, increasing transparency and allowing central banks to supply funding to banks against a broad range of collateral, the report said. The BIS also endorsed lengthening debt maturities.
Banks can “mitigate, but not eliminate” risk by maintaining additional capital and diversifying their sovereign-debt holdings to include more foreign assets, it said.
“Given the challenges for fiscal policy, supervisors and central banks need to prepare for the likelihood of a sustained period of higher and more volatile sovereign risk premia,” the report said.
The ECB, in coordination with the Federal Reserve and other central banks yesterday, said it will lend dollars to euro-area banks in a series of three-month loans to help them meet demand for dollars. The supply of loans in dollars has fallen as U.S. money-market mutual funds cut lending due to the inability of policy makers to contain the debt crisis.
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