TAILIEUCHUNG - Solving the Financial and Sovereign Debt Crisis in Europe

The Committee evaluated the case for lowering the 20% CCF under the Basel II standardised and FIRB risk-based measures. The CCF is relevant for short-term self- liquidating trade letters of credit arising from the movement of goods. Essentially, it reduces capital requirements by 80% as compared to positions that are subject to a 100% CCF. The current 20% CCF has been part of the Basel capital framework since their inception in 1988. The CCF expresses the likelihood of an off-balance sheet position to become on- balance sheet, ie it is not related to the riskiness of a counterparty which is expressed. | OECD Journal Financial Market Trends Volume 2011 - Issue 2 OECD 2012 Pre-print version January 2012 Solving the Financial and Sovereign Debt Crisis in Europe by Adrian Blundell-Wignall This paper examines the policies that have been proposed to solve the financial and sovereign debt crisis in Europe against the backdrop of what the real underlying problems are extreme differences in competitiveness the absence of a growth strategy sovereign household and corporate debt at high levels in the very countries that are least competitive and banks that have become too large driven by dangerous trends in capital markets banking . The paper explains how counterparty risk spreads between banks and how the sovereign and banking crises are serving to exacerbate each other. Of all the policies proposed the paper highlights those that are coherent and the magnitudes involved if the euro is not to fracture. JEL Classification E58 F32 F34 F36 G01 G15 G18 G21 G24 G28 H30 H60 H63. Keywords Europe crisis structural adjustment financial reform counterparty risk rehypothecation collateral sovereign crisis Vickers ECB EFSF ESM euro derivatives debt cross-border exposure. Adrian Blundell-Wignall is the Special Advisor to the OECD Secretary General on Financial Markets and Deputy Director of the Directorate for Financial and Enterprise Affairs DAF . The author is grateful to Patrick Slovik analyst economist in DAF who provided the data for Tables 2 3 4 and 5 and offered valuable comments on the issues therein. The paper has benefitted from discussions with Paul Atkinson Senior Research Fellow at Groupe d Economie Mondiale de Sciences Po. The author is solely responsible for any remaining errors. This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or the governments of its member countries. 1 SOLVING THE FINANCIAL AND SOVEREIGN DEBT CRISIS .

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