When Sovereign Debt Is No Longer Risk-Free

Bloomberg Businessweek reports:

The European debt crisis may force banking regulators to diminish the central role of government bonds in planned rules designed to make the financial system safer. As they fine-tune the new regulations, scheduled to take effect starting in 2013, the officials face a balancing act between acknowledging investors’ loss of confidence in sovereign debt and the need to avoid undermining governments’ credibility.

The Basel Committee on Banking Supervision, which coordinates regulations for 27 nations around the world, approved preliminary guidelines, known as Basel III, in 2010. The rules govern, among other things, how much cash and other liquid assets banks must have on hand to withstand short-term funding crises. Basel III’s so-called liquidity coverage ratio calls for banks to hold enough “high-quality liquid assets”—mainly cash and government debt—to survive 30 days of stress.