Global banking supervisors are reviewing a rule that allows banks to hold little or no capital against risky sovereign debt held on their books.

The so-called zero-risk weighting rule was heavily criticised during the euro zone debt crisis when several countries in the single currency area had to be bailed out.

Even though the ratings on these countries' debt sank to junk status in some cases, banks were allowed to hold little or no capital.

The rule requires banks to hold capital commensurate with the underlying credit risk, but European regulators allow banks to hold no capital against debt held in their currency.

The reasoning is that a country can always print money to pay interest on its debt even when in trouble, though this is not possible for euro zone countries, including Greece and Ireland who had to be rescued.

The euro zone debt crisis triggered calls for a review of the global rule written by the Basel Committee of banking supervisors, but the issue had been too politically sensitive to tackle until now.

'The committee has initiated a review of the existing regulatory treatment of sovereign risk and will consider potential policy options,' the Basel Committee said.

'The review will be conducted in a careful, holistic and gradual manner.' No time frame was given.

Hard-pressed national treasuries like the existing rule because it encourages banks to buy their debt.-Reuters