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German central banker urges rule change for risk-free government bonds

[WASHINGTON] Regulators around the world urgently need to change rules that allow banks to consider loans to governments risk-free, a top official at the German central bank said on Monday, a lesson brought home by Europe's debt crisis.

"It appears urgently necessary to change those rules ... if banks were required to do that, that would make them more resilient to financial distress," said Andreas Dombret, who is in charge of banking supervision at the Bundesbank.

In January, global bank regulators said they had started a review of the rules that allow banks to hold little or no capital against risky sovereign debt held on their books.

The so-called zero-risk weighting rule was heavily criticised during the eurozone debt crisis when several countries in the eurozone had to be bailed out, but the issue had been too politically sensitive to tackle.

"We obviously need to rethink the assumption that loans to every single government (are) by definition risk-free," Mr Dombret said in a speech to bankers.

The rule requires banks to hold capital commensurate with the underlying credit risk but European regulators allow banks to hold no capital against debt held in their currency.

Hard-pressed national treasuries like the existing rule because it encourages banks to buy their debt, and some countries fear that change would mean a two-tier debt market emerging as lenders opt for low-risk bonds like German Bunds to save on capital requirements.

REUTERS