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June 4, 2012

Regulators Pushing Sovereign Debt on Banks?

I read an article on CNBC last week that detailed the apparent policy of regulators to push sovereign debt on the balance sheets of banks.  I was a little skeptical at first, simply because of the push towards real estate investments that got us into trouble in 2008.

The proof of this is presented in the Basel requirements. Basel basically deems sovereign debt as a risk free type of asset. Banks can "load up" on sovereign debt without having the capital requirements they need to invest in mortgages, consumer loans, or stock investments. Without those capital requirements, it will be easier for banks to purchase sovereign debt over any other type of investment.  Imagine, with no capital requirements, our banking sector if Treasury prices moved in the direction of Europe.

Finally, with record low yields, the question needs to asked.  With banks loading up on treasury debt at 1%, how is this helping the financial system lend to small businesses and consumers?  Would you lend money to the United States government for 10 years at 1.5% interest?

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