1. Home
  2. Studies
  3. An Evaluation of Sovereign-backed Securities (SBSs)
Markus Demary / Jürgen Matthes IW-Policy Paper No. 12 28. June 2017 An Evaluation of Sovereign-backed Securities (SBSs)

The EU Commission proposes establishing Sovereign-Backed Securities (SBSs) as a class of safe assets for the euro area. SBSs are generated by an issuing agency that would purchase a large diversified portfolio of national sovereign bonds, and finance the purchases by issuing (at least) two types of structured bonds: a risk-free senior SBSs tranche and a risky junior SBSs tranche.

Download PDF
An Evaluation of Sovereign-backed Securities (SBSs)
Markus Demary / Jürgen Matthes IW-Policy Paper No. 12 28. June 2017

An Evaluation of Sovereign-backed Securities (SBSs)

IW policy paper

German Economic Institute (IW) German Economic Institute (IW)

The EU Commission proposes establishing Sovereign-Backed Securities (SBSs) as a class of safe assets for the euro area. SBSs are generated by an issuing agency that would purchase a large diversified portfolio of national sovereign bonds, and finance the purchases by issuing (at least) two types of structured bonds: a risk-free senior SBSs tranche and a risky junior SBSs tranche.

Overall, we recognise that the SBSs concept has the theoretical potential to improve financial stability and financial integration in the euro area, provided it is built on a sound framework that overcomes several potential technical and political problems. However, SBSs could pose the risk of eventually leading to unconditional debt mutualisation in times of severe crisis.

With regard to technical problems, it is not clear whether the SBSs concept represents a viable business model for a private entity, and whether senior and junior SBSs would find sufficient demand, particularly in times of crisis. If the market for the junior tranche broke down, the whole concept would collapse. In such instances, the political risk could arise that rescue measures are taken that, in contrast to existing rescue mechanisms (ESM and OMT), are not subject to sufficient controls by Member States, solvency tests and reform requirements (conditionality). Another political risk relates to the introduction of the SBSs concept, which is regarded here as one part of a political compromise. We foresee the danger that the second part –de-privileging national sovereign bonds in banking regulation to sever the sovereign-banking nexus – may not be followed through, due to political resistance and to sequencing problems with introducing SBSs. Other political problems concern possible market distortions even in non-crisis times (particularly in primary markets), and the potential irreversibility of the concept.

If the general political will is found to consider establishing SBSs after the German elections, the concept should only be introduced if a public consultation clearly showed that it was sufficiently promising. It is only in this instance that our suggestions for a sound rules-based SBSs framework become relevant: the SBS agency needs to be a private entity in order to prevent political interference and should buy national sovereign bonds only at market conditions to avoid distortions. Senior and junior SBSs tranches need to be created with a conservative tranching strategy to guarantee sufficient safety and demand. Banks should be able to hold junior SBSs only with risk-adequate capital requirements and strict volume limits. The de-privileging of national sovereign bonds can and must be guaranteed by a forward-looking but legally binding decision. In the meantime, privileges for SBSs must not go beyond those currently relevant for national sovereign bonds. Clear arrangements are needed ex ante for severe crises, to prevent unconditional rescues. However, it remains questionable whether such a framework can prove time-consistent.

Download PDF
An Evaluation of Sovereign-backed Securities (SBSs)
Markus Demary / Jürgen Matthes IW-Policy Paper No. 12 28. June 2017

Markus Demary / Jürgen Matthes: An Evaluation of Sovereign-backed Securities (SBSs) – Potentials, Risks and Political Relevance for EMU Reform

IW policy paper

German Economic Institute (IW) German Economic Institute (IW)

More on the topic

Read the article
How to reduce electricity prices – ideas of the Affordable Energy Act
Alexander Radunz / Sandra Parthie Event 29. January 2025

Breakfast debate: How to reduce electricity prices – ideas of the Affordable Energy Act

While Member states are ultimately responsible for their energy mix; their decisions have cross-border consequences. They impact the prices at the EEX and the use and need for interconnectors. We want to take a holistic look at these dynamics and focus on the ...

IW

Read the article
Markus Demary / Vera Demary IW-Policy Paper No. 7 2. September 2024

Crypto regulation in the EU

FC Bayern Munich footballers advertise for the crypto exchange Bitpanda, Crypto.com advertised with rapper Eminem during the NBA playoffs of the Los Angeles Lakers basketball team, whose arena was renamed “Crypto.com Arena” in 2021.

IW

Content element with id 8880 Content element with id 9713