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Favourable treatment of government bonds in financial regulation
In financial regulation, government bonds are in several respects treated as if they were risk-free. Regulation affects banks' behaviour, and failure to take the risks on certain assets into account may distort the banks' investment decisions. Hence, regulation may give banks an incentive to make disproportionately large investments in government bonds. Favourable treatment of government bonds applies when calculating risk weights, in the regulation of large exposures and in the new liquidity regulation. Danmarks Nationalbank finds it positive that the treatment of sovereign exposures in financial regulation is being reconsidered at the international level. Vol. LIII, No. 1