Banks can also choose to be exposed to sovereign debt in some countries as the alternative (private lending) is riskier given existing legal and institutional imperfections. Finally, the current regulatory setup gives preferential treatment to sovereign exposures, as banks’ exposures to domestic government in domestic currency are subject to low or even zero risk weights. 1/2  BIS central bankers' speeches  While banks’ sovereign exposures in advanced countries are considered to hover at reasonable levels, exposures in many emerging market countries are significant. The current level or its buildup is becoming a relevant concern to emerging market countries, mainly owing to credit and concentration risks. As the sovereign debt crisis in Europe showed recently, the zero risk weight commonly applied to sovereign exposures in domestic currency might not be fully consistent with empirical observations of the risks of sovereign debt defaults. Hence, the default risks of sovereign issuers need to be reflected accurately in risk weights to ensure that banks have appropriate ex-ante incentives to take on such exposures. Besides credit risks, excessive sovereign exposure concentration reinforces the link between sovereign and banking sector stress. In fact, the close relationship between sovereigns and banks is seen as one of the major reasons for the severity of the Eurozone crisis. Therefore, breaking the sovereign-bank nexus is needed in order to strengthen macroeconomic stability. Nevertheless, our prudential treatment of sovereign exposures needs to strike a balance. It has to bear in mind the specific role sovereign debt plays in financial markets.

On the contrary, they need to contribute to the design of the measures to make them robust and effective across countries. Similar holds for regulatory objectives, as what is considered a priority for regulators in advanced countries, like the G20 countries, might not be considered as urgent in emerging market countries. In this regard, I welcome and strongly support the effort of the Basel Consultative Group (BSG) as a forum for deepening the engagement of the BCBS with non-member authorities, international institutions, and regional groups of banking supervisors on the regulatory reform and banking supervisory issues. I see cooperation between the BCBS and the BCG as a key component helping to design robust regulation and supervision, taking into account financial sector aspects in both advanced and emerging markets and developing countries. As a member of the BCG, the CNB has actively participated in the work of the group. We contributed to the work agenda evaluating major intended and unintended consequences of Basel III implementation for emerging and smaller economies in the past. We also hosted a workshop on this topic in 2013. As I see your workshop agenda, I appreciate that you are going to discuss the timely issue of sovereign exposures in emerging markets. The reasons for the high share of government bonds in commercial bank assets in emerging markets are clear and straightforward. Financial markets in these countries are still under development and shallow, which is limiting their ability to diversify assets.