Very interesting exchange between Sabine Lautenschläger @ecb and @sven_giegold on whether sovereign concentration risk belongs to pillar-1 (P1) or pillar-2 (P2), at the Nouy farewell conference in Frankfurt. A seemingly arcane but highly topical matter. (mini-thread 1/)
Asked about whether sovereign concentration risk should be P1 or P2, Lautenschläger responds: can only be P1. Reasoning: legislators considered it, decided it’s not P1, everyone knows it. We at @ecb cannot override this. 2/
Jonathan Faull, who was head of DG MARKT (now FISMA) when SSM Regulation was drafted and adopted, concurs with Lautenschläger. It’s P1, can’t be achieved with P2. 3/
Then @sven_giegold counters: SSM Reg gives @ecb wide discretion on P2. If you believe sovereign debt is risky, you have to act accordingly under P2. Your duty as a supervisor. 4/
Elke König @EU_SRB then bravely tries synthesis: “if [sovereign risk] is not in P1 it’s very difficult to address with P2; but if you try to address it with P2, you may trigger the [necessary] debate on P1.” 5/
My own conclusion FWIW: sovereign concentration risk belongs squarely in P1; sovereign credit risk belongs to P2 only, as long as we don’t have eurobonds, i.e. for the foreseeable future. 6/ (the end)
