Today’s post by Sinead Morrow shows that over the last decade, banking institutions have significantly expanded their portfolio exposure to public liabilities, notably sovereign debt instruments. This structural portfolio reallocation is dual-driven: first, by stringent macroprudential regulatory mandates requiring elevated holdings of high-quality liquid assets; and second, by highly attractive risk-adjusted relative returns yielded by these instruments. Consequently, these dynamics raise critical policy concerns that such regulatory frameworks may endogenously amplify the crowding-out of private sector credit, structurally reinforced by the pronounced steepness of the domestic sovereign yield curve.
