By Jan Strupczewski
BRUSSELS (Reuters) - Euro zone finance ministers agreed on Thursday to take balanced and responsible decisions in the sensitive area of regulating banks' holdings of sovereign bonds, so as not to put the sector at a competitive disadvantage.
German Finance Minister Olaf Scholz proposed on Wednesday that to increase the stability of banks, badly shaken by the default of Greece, they should no longer treat government bonds as risk-free and make provisions for the risk they represent.
Scholz proposed that EU law should make sure banks have a financial incentive not to accumulate too much debt of a single sovereign to safeguard them in case a government runs into financial trouble and its bonds become junk, as in Greece.
The chairman of euro zone finance ministers Mario Centeno told a news conference after the ministerial talks that the German proposal was welcomed but that the ministers understood how sensitive the topic was for the financial sector.
"The message is that we will take balanced and quite responsible decisions to protect both our financial sector and to promote a more stable financial sector at the European level," Centeno said.
In exchange for euro zone acceptance of such regulation of sovereign bond holdings of banks, Germany would be willing to discuss setting up a European Deposit Insurance Scheme that would provide EU help for depositors in case of bankruptcies.
But the plan got quickly rebuffed by Rome, because limits on sovereign bond holdings are hard to swallow for a country that has 2.3 trillion euros of public debt held mainly domestically.
Of the total, according to the CEPS think-tank, Italian banks own 400 billion and the Italian central bank another 400 billion. Italian insurance companies sit on a further 310 billion and households have another 100 billion.
Italian Economy Minister Roberto Gualtieri said the risk weights and the provisions they entail as well as concentration limits on bonds would put EU banks at a competitive disadvantage to those elsewhere in the world not facing such restrictions.
"I welcome the proposal and many aspects related to completion of banking union. On some of the aspects, including on prudential treatment of sovereign exposures, our positions are different," Gualtieri said.
"This is a measure that would have a negative impact also at the international level, the Basel committee has not called for this modification of prudential treatment so that would create a not level playing field at the global level," he said.
The European Central Bank has also been cautious about Europe unilaterally removing the zero-risk weight from euro zone government bonds, and signaled such a change should happen on a global scale so as not to put EU banks at a disadvantage.
Accumulating more capital to provide for the risk bonds represent would additionally raise costs for euro zone banks, already struggling to make money because of negative yields most government debt and negative ECB interest rates.
"We will be quite responsible in making decisions, because we don't want to jeopardise the conditions of our markets," Centeno said.
Gualtieri said discussions on making banks' bond holdings more secure should instead focus on creating a European Safe Asset -- a bond based on bonds of all euro zone governments that, under a Commission proposal, would help provide stability.
But the safe asset proposal had been firmly rejected by Germany where policy-makers are concerned it would create moral hazard and be the first step towards mutualising debt in the euro zone which Berlin is firmly against.
(Reporting by Jan Strupczewski, Francesco Guarascio and Marine Strauss; Editing by Alexandra Hudson)