European banks have increased their holdings of government bonds by 14% over the past year, a shift that could amplify risks if fiscal troubles in indebted countries lead to a selloff in sovereign debt, a senior European Banking Authority (EBA) official told Reuters.
Kamil Liberadzki, head of Economic and Risk Analysis at the EBA, told Reuters the increase represents a "big change" as European governments borrow more at higher rates to fund defense and other spending initiative, making bonds more appealing to lenders.
While the current rise in bond yields appears manageable, Liberadzki warned that a significant economic slowdown or a spike in yields could diminish the value of bank holdings and trigger a scenario similar to the "sovereign-bank doom loop" seen during the 2010-2013 eurozone debt crisis.
"Covering (banks') funding needs becomes more expensive. We also have higher risk—greater volatility—in the liquidity buffer held in the form of securities. Hedging costs are rising too," Liberadzki said.
Between June 2022 and June 2025, banks in France, Germany, and Spain accounted for about 60% of a nearly 700 billion euro increase in government bond holdings, the highest level since the onset of the pandemic.
This buildup partly reflects the European Central Bank's quantitative-tightening programme, which compels lenders to replace excess cash with liquid government securities to comply with regulations, said ING senior rates analyst Michiel Tukker.
However, "the primary concern lies in the sovereign-bank nexus – the close interdependence between governments and domestic banks through sovereign debt holdings," Bundesbank board member Michael Theurer told Reuters.
Some euro area countries are again under scrutiny regarding debt levels and fiscal plans, and an erosion of trust in public finances could lead to banks reducing lending and uspetting market liquidity, he said.
Theurer added that the eurozone debt crisis had demonstrated how quickly risk premia can escalate when confidence erodes.
