a real and well - known risk of fiscally overburdened states possibly infecting their own banking system and triggering a solvency crisis at banks. and this sovereign - bank nexus, in turn, affects the ex - ante likelihood of a european deposit insurance scheme becoming involved. in order to improve the current situation, a crucial element has to do with current incentives contained in banking regulation. at present, sovereign bonds from member states of the euro 3 / 5 bis central bankers'speeches area have a zero risk weight under the capital requirements regime. essentially, this means that the economic risk attached to sovereign debt ( which is larger than zero ) is not reflected in capital requirements. nor is there any upper limit for exposures to specific sovereigns. this preferential treatment is a factor that actually contributes to the sovereign - bank nexus and therefore needs to be altered. please bear in mind that given the risks that are currently not resolved in several areas, a third pillar is not only unjustified because of the heterogeneous levels of risk at national banks. it would also reduce incentives to address those national issues if a mutualised insurance scheme were in place. so as you can see, the reasons for postponing edis are founded not on an ideology - based rejection, but very much on stability considerations. 4 the road to stability : are we locked in a stalemate? this brings me to a second mindset i frequently encounter when discussing the future of the banking union. it concerns the idea of a trade - off between crisis mitigation and crisis prevention measures. essentially, some interpret the ongoing risks for the euro area as a sign that we are approaching a stalemate situation, where self - recovery potentials in the financial system will be exhausted – as will options for action. in this situation, the reasoning goes, would it not be better to compromise on short - term oriented “ flexible ” measures – however counterproductive in the medium and long term? and would this not be an argument for an immediate completion of the banking union? the great value of systemic analyses is beyond doubt. but at the same time, i wonder whether a simple trade - off between short - term and long - term goals might not be the result of over - hasty generalisations. let me set these thoughts in the context of our main topic of european deposit insurance. my guess is that here, too, hasty calls for new policy agendas are partly the result of a too - narrow

##s and banks. such change will never be popular, and it is clear that we need an appropriate transitional phase, such as by gradually phasing in new rules. additional measures may be needed in order to avoid adverse effects on banks and sovereigns alike. 6. conclusion let me conclude by summing up what i believe to be the indispensable elements of “ good regulation ”. the aim of “ good regulation ” is to maintain the stability of the financial system, thus ensuring that the financial sector has the tools it needs to completely fulfil its role for the real economy. it is therefore important that market economy principles – such as the unity of liability and control – also apply to the financial sector. moreover, strong institutions are needed to implement and apply regulation. lastly, a macro perspective is needed. this means that we need not only the existing microprudential regulation but also a new, systemically - oriented regulatory framework. the two must go hand - in - hand. on top of all this, we need to be highly vigilant towards potential design flaws and unintended consequences in all of these regulatory projects. and we also need the wisdom to make corrections if need be. after all, the financial system is evolving relentlessly. “ good regulation ” will thus always be a work in progress. this marks the end of my introductory remarks. i look forward to our discussion. bis central bankers ’ speeches