They have now been caught by the “standards and codes” that have been set by multilateral agencies, such as the Financial Action Task Force (FATF) (concerned about money laundering and the financing of terrorism); the OECD (concerned about Harmful Tax Competition); and the Financial Stability Forum (concerned about transparency and information transfer etc.).
While bank exposures to a single counterparty are limited, in principle, to a quarter of their eligible capital, exposures to sovereigns are exempted from that large exposures regime. Sovereign exposures are also privileged by low or zero capital requirements. Preferential regulatory treatment makes it highly attractive for financial institutions to invest in government bonds – and those of their home countries in particular.