Although Germany and others have pushed Basel to increase the zero risk-weighting now applicable to qualified sovereign assets, the Basel Committee has now taken only a very tentative step forward on this contentious question. A new paper assesses the merits of revising sovereign risk-weighted assets (RWAs) and of addressing related provisions (e.g., zero RWAs for riskier sovereign assets denominated in the home- or host-country currency, exemption from large-exposure limits, the relationship between zero RWAs and the leverage ratio, and interactions with global liquidity regulation). Although Basel seeks comment on it, the Committee is at pains to emphasize that this document is not a consultation – which might suggest future action – but rather just a discussion draft that binds no one to anything. Nonetheless, the framework laid out will not only move global debate forward, but also affect interim actions such as changes to market-risk capital treatment of sovereign RWAs and efforts to use national discretion or simply buck the global approach to provide more favorable treatment in this arena.
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