Global banking regulations treat government debt as completely safe, even though it can trigger a total systemic collapse when interest rates rise.
April 26, 2026
Original Paper
The Sovereign Duration Regulatory Blind Spot: Why Capital Adequacy Ratios Understate Systemic Risk During Monetary Tightening
SSRN · 6622680
The Takeaway
The Basel III safety rules are designed to prevent banks from taking too much risk with their customers' money. These rules have a blind spot because they assume government bonds are risk free and do not require banks to hold extra cash against them. When the Federal Reserve raises interest rates quickly, the value of these bonds drops, leaving banks with massive hidden losses. This specific oversight led to the recent failure of Silicon Valley Bank and remains a threat to the entire global financial system. The current metrics used to measure the safety of your bank are essentially lying about the real danger of government debt.
From the abstract
The world's financial system is currently experiencing the most extreme tightening cycle of monetary policy in 40 years; however, despite Capital Adequacy Ratios suggesting that banking systems remain well-capitalized, the failure of Silicon Valley Bank in 2023 highlighted a significant measurement gap in the global regulatory framework. This paper addresses the primary problem: that all sovereign debt securities are classified as "risk-free" under the Capital Adequacy Ratio (CAR) risk-weighting