As a good example one can take the case of a country which in which banks’ credit rating is downgraded from AA to BBB (like Spain). Under the standardized approach the risk weight is only 20% for counterparties in AA-rated countries, but 100% for BBB-rated countries. A fall in the rating from AA to BBB therefore implies a jump of 80 percentage points in the risk weight. In practice this means a higher cost for cross-border lending, because Spanish supervisors are unlikely to apply this rule to domestic lending by Spanish banks whereas German supervisors are very likely to apply this rule to German banks lending to counterparts in Spain.
Eurozone banks have reduced cross-border lending within the Eurozone by $2.8tn since the end of 2007 (**)
(*) Daniel Gros. “The Single European Market in banking in decline – ECB to the rescue?”, Vox, 12 October 2012. (**) Howard Davies & Susan Lund: “Three steps to stop global finance disintegrating”, Financial Times, 21 March 2013.
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