A key remaining issue for the completion of the Banking Union is the concentrated exposure of banks in many countries to their own sovereign. This paper examines the belief that banks should be allowed to buy large amounts of their own sovereign in the expectation that they can stabilise the market in a crisis and argues that it is mistaken. The author cites two reasons for this conclusion: banks are only intermediaries for private savings, and banks have a higher cost of funding than do their sovereign. The overall conclusion is that governments should make it more attractive for households (and other real money investors) to hold government debt directly.
Daniel Gros is Director of CEPS. This contribution was previously published on VoxEU, 27 November 2017, and is republished on the CEPS website with the kind permission of VoxEU.
