This is particularly the case for Italian debt, which is widely held by non-Italian banks. Given the rise in yields that has occurred in some countries, the market value of the bonds has declined significantly. Greek debt, for example, has fallen in value by around 70 per cent.
From a policy perspective, the critical points would be the last two – having effective regulation over the regulated entities, while restraining leverage capabilities of the unregulated/lightly regulated entities. In our case, it proved to be an effective combination since banks’ exposure to such entities could be regulated through absolute exposure norms or even tweaking the risk weights applicable to such exposures.