A Research On European Banking Regulations And Their Treatment Of Sovereign Debt

Many Eurozone banks hold “periphery” bonds and many analysts are concerned that they do not have sufficient capital to absorb losses on their holdings of sovereign bonds should one or more Eurozone governments default or restructure their debt. The crisis has also triggered capital flight from banks in some Eurozone countries, and some banks are reportedly finding it difficult to borrow in private capital markets, causing some investors to fear a banking crisis in Europe that could have global repercussions.”

One of the primary feature of the Global Financial Crisis, as well as other previous financial crises, was the build up of excessive on and off-balance sheet leverage in the banking system. The force on the banking system to reduce its leverage caused a forced decline on asset prices worsening the feedback between looses, deterioration in bank capital and the reduction of credit availability. The framework introduced a leverage ratio requirement, fixed at 3% (actuaries.asn.au, 2011), which aims to constrain leverage in the banking sector, and introduce additional protection against model risk and measurement error. This will help alleviate the risk of the deleveraging processes, which can damage the financial system (bis.org, 2010). The introduced leverage ratio will be a reliable extra measure to the risk-based requirement.

Since the onset of the financial crisis 2008, the sovereign debt crisis in western economies and the new financial regulation with Basel III coming up, the financial industry faces the challenge of reinventing itself. The ring-fence for Commercial and Investment Banking, and new economic and regulatory capital requirements will determine the kinds of products banks will be able to distribute. It will have a huge impact in the Investment Banking business, which will suffer tough regulation and supervisory procedures. At the same time, credit risk models will be reviewed because they have failed to predict the crisis of 2008. The current financial and economic crisis doesn’t have any precedent in the past.

A sovereign debt crisis is basically a government debt, also known as a national debt; it is money or credit owed by any level of government. Government deficits refer to the difference between government receipts and spending in single year. Debt of a sovereign government is called sovereign debt, which is an indirect debt of the taxpayers. This debt can be categorized as internal debt, owed to lenders within the country and external debt owed to foreign lenders. Governments usually barrow by issuing securities, government bonds and bills, rarely do they barrow directly from supranational institutions. Moreover, Government debt considers all government liabilities, including future pension payments for goods and services that the government

In Europe, the single currency created additional problems because of overvalued exchange rates, and high bond yields.” (Pettinger, 2013).

The economic turmoil of 2008 is arguably the worst financial crisis since the great depression of the 1930s. Although financial crisis is not entirely new, each one is characterized by unique challenges that make it difficult to make a prediction on when and how the next financial crisis might occur. The financial crisis of 2008 to 2009 was marked by a failure in the efficiency of the financial markets, inability of regulatory bodies to regulate the financial product and was catalyzed by weak macroeconomic fundamentals prevailing at the time. In the aftermath of the turmoil financial crisis, there has been a debate in the financial community on whether there are specific indicators that precipitate a financial crisis and whether the global economy is at a risk of experiencing the a repeat of a financial crisis of a similar nature to the crisis of 2008. The

To address this deficiency, the Basel Committee on Banking Supervision (BCBS) proposed the post-crisis regulatory capital framework - Basel III, aimed to improve both the quantity and quality of banking organisations regulatory capital and to build additional capacity for loss absorbency into the banking system to withstand markets and economic shocks (BCBS). The importance of capital to a banking organisation cannot be overemphasised, the amount of capital held by a bank determine: (i) the level risk the bank can enter into. (ii) Loss absorbency capacity. (III) The profitability level. (iv) The cost of fund. (v) Investors' confidence, and (vi) the going - concern of the bank. It is vital that banking organisations are able to maintain a balance between their capital risk portfolios. As a result, banks tend to adjust their balance sheet components to achieve an internally set capital

A decent beginning stage for the investigation of sovereign debt is an investigation into why an autonomous nation, with interior wellsprings of financing, would need to get cash from outsiders. In the first place, no nation has an endless supply of assets accessible for venture. Nations confront the same monetary decisions going up against people and organizations in a universe of shortage. A nation must choose how quite a bit of its asset supply to devour and how many of their assets supply to put resources into the trust of expanding future utilization.

Market risk is the risk associated with an investors day to day investments, that are affected by constant fluctuations in the markets. With investment banking, a banks reputation is a critical in its success, reputational risk describes the trustworthiness of a business. A firm with a poor reputation will not get as much business, meaning a bad reputation results in a loss in revenue. Concentration Risk is the risk showing the spread of a banks’ accounts to various debtors to whom the bank has lent to. The Basel II accord stated that ‘operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events’. This risk covers the very wade basis of a company’s operations, there are many different factors involved here: people, employees actions and company processes.

The Eurozone is facing a serious sovereign debt crisis. Several Eurozone member countries have high, potentially unsustainable levels of public debt. Three—Greece, Ireland, and Portugal—have borrowed money from other European countries and the International Monetary Fund (IMF) in order to avoid default. With the largest public debt and one of the largest budget deficits in the Eurozone, Greece is at the centre of the crisis. The crisis is a continuing interest to Congress due to the strong economic and political ties between the United States and Europe.

Country risk refers to the risk that would either positively or negatively affect the future prospect of a given investment, depend on the possibility of occurrence of the political events (Bouchet et al, 2003). The upcoming in-out referendum on the UK’s membership of the European Union (EU) has caught the attention of people around the world. A number of debates about the UK should remain in or leave the EU has been held. Undoubtedly, the upcoming referendum could bring country risk exposure, particularly country-specific economic risk. It is impossible to know the exact answer before the referendum. However, the trade-off that the UK would face would be the same regardless of it is inside or outside the EU (Dhingra and Sampson, 2016).

With the impending Presidential election consuming the American news cycle, major media outlets and the general public alike have neglected a growing crisis within one of the world's most important centers of commerce and culture. Despite the domestic rancor over stimulus packages, runaway debt and rampant unemployment which has inspired fierce political debate here in America, the fact remains that many European countries have borne the brunt of the global recession currently decimating national economies. The so called Euro Zone, a consortium of 17 neighboring nations which belong to the European Union (EU) and have adopted the Euro as their common currency, has experienced unimaginable financial disarray during the last decade. In the modern age of globalized economic structures, the increasing instability emanating from European markets is now threatening to spread to Asia, America and around the world.

The recent financial crisis that was felt around the globe and most significantly in the USA and Europe has had various detrimental and long lasting effects. Superficially the effects felt by the USA and Europe appear to be the same, but there are important differences in its effect, and the way in which both dealt, and are still

The European sovereign debt crisis, which made it difficult or impossible for some countries in the euro area to repay or re-finance their government debt without the assistance of third parties (Haidar, Jamal Ibrahim, 2012), had already badly hurt the economies in “PIIGS”, Portugal, Ireland, Italy, Greece and Spain. This financial contagion continues to spread throughout the euro area, and becomes a dangerous threat not only to European economy, but also to global economy.

Yet another concern centres on “moral hazard”—that is, the possibility that fiscally irresponsible policies by recipient countries will be effectively rewarded and thereby encouraged by bailout loans. While theoretically a serious concern, the existence of such moral hazard has not been proved.