The Italian central bank governor warned against attempts led by Germany and the Netherlands to make the euro zone impose such limits to break the so-called "doom loop" between weak sovereigns and weak banks, saying it could actually increase the severity of financial crises.
Sovereign bonds are currently considered 'risk-free', meaning banks do not have to hold any capital against them and there is no limit to how many bonds issued by a single state each bank can own.
"The imposition of risk weights or, worse, tight concentration limits could be particularly disruptive for banks' ability to act as shock absorbers in the event of sovereign stress," Visco told a conference of the Euro50 reflection group.
"I doubt that further changes in prudential regulation are the right instrument for addressing the sovereign-bank nexus," he said. "My personal view is that the potential benefits of a reform are uncertain, while the potential costs could be sizeable."
Visco said that as long as the effect of limiting or risk-weighting banks' sovereign holdings was uncertain, it would be prudent to wait for the financial system to recover fully and for recent regulatory reforms to deliver results before making further changes.
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