International bank capital standards assign zero risk to own government bonds in its own currency. This makes eminent sense since the central bank will never let its government default on its own-currency debt.

Except, of course in the eurozone where there is no federal debt and the ECB and national central banks are barred from directly financing their governments.

As it turns out, the prohibition of monetary financing applies to all EU member states, but I would be shocked if the EU tried to tell a non-eurozone central bank it cannot buy its own government's bonds.

Now, the EU capial requirements regulation incorporates this idea by giving EU member state government debt zero risk weights in bank capital.

Arguably this makes the CRR lenient because it assigns zero risk weights to eurozone government bonds that the eurozone policy establishment has already proved it's willingness to force into default (see Greece's "private sector involvement" in 2012).

In addition, the CRR assigns zero risk weight to third-country government bonds when that country has an equivalent bank regulatory regime to the EU.

So, if the UK crashes out of the EU and the EU does not grant the UK regulatory equivalence, then UK government bonds held by EU-supervised banks may automatically acquire a risk weight (unless the UK retains an AAA credit rating).

The UK, acting reciprocally, would then assign risk weights to EU27 member state government bonds.

Now, what is perhaps bizarre is the implication in all these press stories that the UK would turn this into a bargaining chip in order to extract regulatory equivalence as an EU27 concession. This is because in the absence of equivalence it would become prohibitively expensive to hold EU government bonds in UK portfolios. The natural response would be to move those portfolios intra-group to an EU27-based subsidiary. The only damage would be tó the City of London which would lose market share in the bond market.

But, as Boris Johnson said, "fuck business", and presumably fuck the City as well.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman