‘Doom loop’ tying European banks and governments reinforced

European banks have filled their balance sheets with national debt since 2011, bringing them easy profits but reinforcing a “doom loop” linking weak banks to governments with shaky finances. The euro zone debt crisis showed banks can suffer big losses from holdings of their own countries’ bonds, which in turn can torpedo state finances if banks need to be bailed out. Policymakers have been trying to loosen the mutual exposure of banks and governments that ensured they dragged one another down during the crisis. But the European Banking Authority (EBA), the European Union’s banking watchdog, said on Monday the share of bonds issued by sovereigns under stress held by their domestic banks had “increased markedly” between December 2010 and June 2013.

    

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