If the noises coming from the Basel Committee on Banking Supervision (BCBS) and the European Central Bank (ECB) are to be believed,regulators are about to call time on one of the biggest and most lucrative arbitrage opportunities in modern finance.
The application of a zero-risk weight to sovereign debt in successive Basel reform packages has allowed banks to engage in a souped-up carry trade by holding such assets and reaping their returns, while setting aside no capital against the possibility of their default.
