Loans to states, local government and public-sector bodies (sovereign exposures) in the banking book have become a focal point for regulation due mainly to the sovereign debt crisis and the zero risk-weighting of eurozone countries. The objective both in the Basel Committee and at EU level was to develop appropriate regulatory policy options to loosen the nexus between sovereign borrowers and banks. The topic is now highly sensitive because a revision of the risk weightings has come to form part of the discussions on completing the banking union. In order to avoid duplication of work, the EU is initially waiting for the outcome of the discussions in the Basel Committee. These are expected to need more time. Due to the high degree of political significance, the work is planned to proceed in a careful, gradual and holistic manner. A further reason for the length of the negotiations is the wide range of different interests still represented in the relevant bodies. It is correspondingly difficult to reach compromises.

A consultation or discussion paper setting out possible courses of action is planned for 2017. The options for discussion are as follows:

• Inclusion of credit risk, involving the introduction of a lower limit for risk weighting and therefore the setting of risk-sensitive capital requirements
  
  
• Inclusion of concentration risk using marginal risk-weighting premiums dependent on the ratio of the exposure value to eligible own funds
  
  
• Improvements in Pillars II and III of the Basel framework, in particular the inclusion of sovereign risk by means of stress tests and increased disclosure of sovereign exposures
  
  
• Alternatively: retention of the status quo

Closely linked to the development of these options is a tighter definition of the state as a borrower unit and the associated risk weighting premiums. This is intended to prevent regulatory arbitrage. The consultation paper therefore also expresses an opinion on this issue and sets out possible solutions.

The draft consultation paper must first be submitted to the Group of Governors and Heads of Supervision (GHOS) in accordance with the mandate. The GHOS will also decide whether the draft will be published as a consultation paper or as a discussion paper.