By Francesco Canepa
FRANKFURT (Reuters) - Some of the world's largest banks are lobbying the European Central Bank against rules forcing them to set aside capital against their holdings of government bonds, documents published by the ECB showed on Thursday.
The measure is one of the tools discussed by global and European regulators to break a 'doom loop' between banks and governments, which exacerbated the 2010-11 euro zone crisis.
But it could result in billions of euros in additional capital for euro zone banks, which own nearly 2 trillion euros (£1.77 trillion) worth of debt issued by governments in the bloc.
Bankers taking part in the ECB's latest bond market contact group on Oct. 10 warned about the risks of introducing such "risk weights" too fast or setting them too high, according to accounts of the meeting published on the ECB's website.
"Any transition to non-zero risk weights on sovereign debt has to be very smooth and gradual in order to prevent a sell-off of sovereign bonds and increased volatility," Kevin Gaynor of Japanese bank Nomura (T:9716) said in his presentation to the group.
The ECB, which holds these regular meetings to gain feedback and insight from market participants, was criticised last month by an activist group for being too close to the financial sector.
In addition to being the euro zone's top banking supervisor, the ECB is part of the Basel committee of global regulators drafting rules aimed at fortifying the world's banking system following the financial crisis.
It also advises the European Parliament on financial matters, including the upcoming review of the Capital requirements regulation and directive (CRR/CRD IV).
"Some members noted that the treatment of sovereign debt in the upcoming review of the CRD IV/CRR could be a source of concern," the accounts of the meeting showed.
"If risk weights for banks were set too high on sovereign debt, this could inhibit the primary dealer model...and lead to increases in bond yields, at least during a transition period."
The meeting was attended by representatives of BNP Paribas (PA:BNPP), Goldman Sachs (N:GS) and Commerzbank (DE:CBKG), as well as other large banks and insurers.
It was chaired by the head of the ECB's market operations and attended by officials from the central banks of Spain, France, Italy and Germany.