Troubled Eurozone governments assumed large increases in their indebtedness as a result of bailing out and attempting to stabilize troubled banking sectors but in turn have continued to rely heavily on domestic banks to invest and fund new sovereign debt issues. During the Eurozone sovereign debt crisis, this symbiotic relationship endangered both parties and brought the economy close to the edge of a secondary recession. Going forward, banking reform will require a thorough understanding of the systemic risks posed by unbalanced holdings of sovereign debt by banks. The 2017 EU-wide transparency exercise provided detailed bank-by-bank data on capital positions, risk exposure amounts, leverage exposures and asset quality for 132 banks across 25 countries of the European Union (EU) and the European Economic Area (EEA). We will examine in detail this new data release by the European Banking Authority of the balance sheet positions. This data release from December 2017 will allow initial empirical estimation of the risk-adjusted asset positions of all major Eurozone banks and enable us to produce an analysis of the contribution to overall risk played by banks domestic sovereign debt holdings. The level and structure of these risks will be important to inform judgments concerning alternative regulatory structure designs to control risk levels.
