Does the euro area need a safe or a diversified asset? CEPS Policy Brief No 2018/03, 24 May 2018

Gros, Daniel. (2018) Does the euro area need a safe or a diversified asset? CEPS Policy Brief No 2018/03, 24 May 2018. [Policy Paper]

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Abstract

The banking system of the euro area can be stabilised even without creating a new ‘safe’ asset. The real problem is the concentration of risk on bank’s balance sheets in the form of large holdings of bonds of the home sovereign. Diversification should be the first priority. But the current regulatory framework hinders diversification of sovereign risk because existing investment funds of euro area government bonds are treated as if they were much less safe and liquid than the individual government bonds themselves.

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