The Core Asymmetry: Europe Owns Far More U.S. Assets

The study, authored by Filippos Petroulakis (Bank of Greece) and Farzad Saidi (University of Bonn, Kiel Institute & CEPR), identifies a $3.2 trillion asymmetry in transatlantic asset holdings as the foundation of Europe's potential financial leverage .

• Europe holds $9.6 trillion in U.S. assets.
• The U.S. holds $6.4 trillion in European assets.

This means Europe's exposure to the U.S. economy is roughly 1.5 times larger than the reverse, giving it a structural advantage .

The Regulatory Lever: Ending the Zero-Risk-Weight Privilege

The report focuses on a specific, existing regulatory lever: removing what it calls the "zero-risk-weight privilege" on U.S. Treasuries under two European regulatory frameworks :

• Solvency II: Governs insurers. The change would be implemented via the spread-risk charge.
• Capital Requirements Regulation (CRR): Governs banks. The change would be implemented via the risk weight.

The authors argue this privilege is "increasingly unjustified" on prudential grounds. U.S. debt-to-GDP is above 120%, and the U.S. has experienced a prior sovereign downgrade . The study frames the change not as a geopolitical weapon but as sound prudential policy that would treat U.S. Treasuries according to their actual credit metrics .

Estimated Impact: $200 Billion in Demand Withdrawn

Conservative estimates from the study imply approximately $200 billion in Treasury demand withdrawn over a decade from European insurers, banks, and pension funds. To put that in context, the authors note this is roughly a quarter of the Federal Reserve's first quantitative tightening (QT1) or a third of QE2 (the Fed's second round of quantitative easing) .

Impact on U.S. Borrowing Costs: $33–$42 Billion Per Year

The study estimates that this demand reduction would increase U.S. Treasury yields by 11–14 basis points. This translates into $33–$42 billion per year in added U.S. federal borrowing costs .

Two modeling approaches support this range :

• Linear scaling from the QT1 benchmark yields roughly 11 basis points.
• A granular demand-system model by Jansen, Li, and Schmid (2025) for a $100 billion permanent demand reduction at the long end yields roughly 14 basis points at the 10-year maturity.

Predicted Market Implications

• Self-reinforcing dynamics: Reallocating insurer capital toward European sovereign and bank bonds would improve European banks' funding structures, reducing their dollar dependence and relaxing constraints that might otherwise deter participation in Treasury divestment .
• Manageable transition: A large share of European dollar holdings is hedged. Partial unwinding of those hedges acts as a shock absorber, allowing dollar depreciation and yield increases to materialize gradually rather than disruptively .
• Replacement flows: Yield-seeking investors would likely step in to moderate, but not eliminate, the structural shift in demand .

Caveats: A Last-Resort Lever

The study presents this potential action with important caveats :

• The authors frame it as a last-resort lever to inform discussions of European strategic autonomy, not a recommended first move.
• The change is presented as sound prudential policy regardless of geopolitical context, correcting a regulatory distortion that is hard to defend given U.S. fiscal metrics.

The Core Asymmetry: Europe Owns Far More U.S. Assets

The study, authored by Filippos Petroulakis (Bank of Greece) and Farzad Saidi (University of Bonn, Kiel Institute & CEPR), identifies a $3.2 trillion asymmetry in transatlantic asset holdings as the foundation of Europe's potential financial leverage .

• Europe holds $9.6 trillion in U.S. assets.
• The U.S. holds $6.4 trillion in European assets.

This means Europe's exposure to the U.S. economy is roughly 1.5 times larger than the reverse, giving it a structural advantage .

The Regulatory Lever: Ending the Zero-Risk-Weight Privilege

The report focuses on a specific, existing regulatory lever: removing what it calls the "zero-risk-weight privilege" on U.S. Treasuries under two European regulatory frameworks :

• Solvency II: Governs insurers. The change would be implemented via the spread-risk charge.
• Capital Requirements Regulation (CRR): Governs banks. The change would be implemented via the risk weight.

The authors argue this privilege is "increasingly unjustified" on prudential grounds. U.S. debt-to-GDP is above 120%, and the U.S. has experienced a prior sovereign downgrade . The study frames the change not as a geopolitical weapon but as sound prudential policy that would treat U.S. Treasuries according to their actual credit metrics .

Estimated Impact: $200 Billion in Demand Withdrawn

Conservative estimates from the study imply approximately $200 billion in Treasury demand withdrawn over a decade from European insurers, banks, and pension funds. To put that in context, the authors note this is roughly a quarter of the Federal Reserve's first quantitative tightening (QT1) or a third of QE2 (the Fed's second round of quantitative easing) .

Impact on U.S. Borrowing Costs: $33–$42 Billion Per Year

The study estimates that this demand reduction would increase U.S. Treasury yields by 11–14 basis points. This translates into $33–$42 billion per year in added U.S. federal borrowing costs .

Two modeling approaches support this range :

• Linear scaling from the QT1 benchmark yields roughly 11 basis points.
• A granular demand-system model by Jansen, Li, and Schmid (2025) for a $100 billion permanent demand reduction at the long end yields roughly 14 basis points at the 10-year maturity.

Predicted Market Implications

• Self-reinforcing dynamics: Reallocating insurer capital toward European sovereign and bank bonds would improve European banks' funding structures, reducing their dollar dependence and relaxing constraints that might otherwise deter participation in Treasury divestment .
• Manageable transition: A large share of European dollar holdings is hedged. Partial unwinding of those hedges acts as a shock absorber, allowing dollar depreciation and yield increases to materialize gradually rather than disruptively .
• Replacement flows: Yield-seeking investors would likely step in to moderate, but not eliminate, the structural shift in demand .

Caveats: A Last-Resort Lever

The study presents this potential action with important caveats :

• The authors frame it as a last-resort lever to inform discussions of European strategic autonomy, not a recommended first move.
• The change is presented as sound prudential policy regardless of geopolitical context, correcting a regulatory distortion that is hard to defend given U.S. fiscal metrics.