Draghi says sovereign debt risk weights are a question for Basel Committee

The European Central Bank (ECB) will not assign specific risk weights to the eurozone sovereign debt held on banks' balance sheets, according to the bank's chief, Mario Draghi, who said any such decision should be made at a global level and at a later date.

Draghi today told the European Parliament that assigning different risk weights to sovereign debt was not a task for the central bank, and that it should be discussed by the Basel Committee "at the proper time".

He insisted the question of risk weights was "nothing to do with" the forthcoming stress tests and that "sovereign debt is going to be stressed like all other categories in the banks' balance sheets".

As it stands, applied sovereign risk weights "vary considerably" for large international banks, according to the Bank for International Settlements (BIS), as EU authorities have allowed banks to set a zero risk weight for sovereign exposures.

Fellow executive board member Peter Praet emphasised in an interview with the Financial Times the importance of "appropriately treating banks' holdings of sovereign debt according to the risk that they pose to banks' capital".

He said including sovereign debt in the stress tests would make it "unlikely that the banks will use central bank liquidity to excessively increase their exposure to sovereign debt", because they would be "wary of the constraints placed on sovereign debt by the stress tests to which they are subject at the same time".

Draghi echoed Praet's comments, and stressed the importance of central bank liquidity filtering through to the real economy. Parliamentarians at today's session bombarded Draghi with demands for more central bank support for small and medium-sized enterprises.

Draghi reiterated that "if and when" the central bank deploys another long-term refinancing operation (LTRO) it will be "designed in a way [that] increases the probability the money reaches the real economy".

He pointed out that the ECB's existing LTROs already had similar features to the Funding for lending schemes around the globe – including long maturity, wide collateral and a wide set of counterparties. "That is why I am saying we need to think further and reflect more deeply about the right instrument," he said.