What are SBBS?

Sovereign bond-backed securities (SBBS) are securities backed by a diversified portfolio of euro area central government bonds. This is a new financial instrument which has been proposed as a solution to help banks diversify their sovereign exposures and further weaken the link with their home governments.

The so-called “doom loop” – whereby a bank’s deteriorating finances put pressure on the fiscal outlook of its home government and a Member State’s degrading public finances in turn weaken banks holding its bonds (which are typically the banks in its own jurisdiction) – proved a key vulnerability in the euro area debt crisis.

SBBS would help address this problem, as banks could use them to diversify their sovereign portfolios. SBBS would also help enhance risk sharing across investors and across borders. Furthermore, SBBS would not involve mutualisation of risks and losses among euro area countries. Only private investors would share risk and possible losses.

Commission proposal on SBBS

In 2016 the European Systemic Risk Board (ESRB) set up an inter-institutional task force to assess the merits and feasibility of SBBS. It published a comprehensive report in January 2018. The report showed that the development of a market for SBBS could reduce risks to financial stability but noted that the current regulatory framework effectively impedes such development. Under current rules, SBBS would be treated as securitisation products, i.e. significantly less favourably than the euro-area sovereign bonds constituting SBBS’ underlying portfolio.

President Juncker’s letter of intent at the State of the Union of September 2017 and the Banking Union Communication of October 2017 also highlighted the potential of SBBS and committed the Commission to take action in this area.

In May 2018 the Commission presented a legislative proposal to enable the development of a market for SBBS. The proposal aims to level the playing field by removing unjustified regulatory impediments and granting SBBS the same regulatory treatment as national euro-area sovereign bonds (in terms, for example, of capital requirements, eligibility for liquidity coverage and collateral, etc.)

This should pave the way to the market-led development of SBBS, boosting the flow of euro-denominated low-risk liquid assets in the system. Banks and other financial operators that invest in these assets will achieve greater diversification and less risk for their sovereign bond portfolios, with a positive impact on the stability of the financial system as a whole.

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