Editorial Board
Breaking the Sovereign-Debt Doom Loop
There's another bit of unfinished business in the new Basel III bank-capital rules.
When banks and governments get too close.
Photographer: Louisa Gouliamaki/AFP/Getty ImagesThe world's central banks recently signed off on the Basel III rules for bank capital. The new system, years in the making, is a step forward: It will make banks stronger and safer. But there are several loose ends. One of the most important concerns the treatment of sovereign bonds on banks' balance sheets.
Banks that hold large, concentrated portfolios of their own governments' bonds can be a threat to financial stability. This practice needs to be discouraged. Unfortunately, the Basel Committee decided, for now, not to act.