effective, but may even turn out to be counterproductive. and there are two reasons for that : 1. given that the sovereign - bank nexus works in two directions, any argument about alleuropean responsibility for deposits is off the mark. how is the euro area community, represented by european supervisors, supposed to assume responsibility for bank failure and give access to funds if they did not have an instrument in place to address sovereign risk beforehand? 2. with additional safety nets in place, incentives to act prudently and responsibly decline. also, these safety nets will make reforms of high - priority issues less pressing. this argument is valid not only for edis, but also for reforms of other mechanisms functioning as safety nets in order to stabilise the financial sector or the economy, like the esm. maintaining reform pressure and reducing risks before establishing a common safety net certainly extends beyond eliminating current privileges for sovereign bonds in banking regulation. it pertains to all excessive risks currently identified in national banking systems. allow me to comment on one of these risk categories later in my speech, namely on large amounts of nonperforming - loans in banks in several member states. these remarks do not mean that i am dead set against a reform of deposit insurance. i am talking about putting the reforms in the right sequence. so my first point is that if we want to improve the structural design of the euro area, we need to address the sovereign - bank nexus – amongst other things – before we create a european deposit insurance scheme. in other words : let ’ s do first things first. 2. no painless way out my second proposition is this : however we seek to rectify an imperfect financial architecture, it won ’ t be painless. overhauling the less - than - ideal statics of a financial construction isn ’ t a simple task, as you see ; it won ’ t happen soon, and it will involve stress. but there is no easy alternative to it. this can be seen if you take a look at discussions surrounding what are known as sovereign bond - backed securities, or sbbs for short. there is no question that this financial instrument is interesting from an academic point of view. but are they interesting as a policy option given the weaknesses of our current financial architecture? some proponents have argued that sbbs could serve as a helpful financing tool, for example because they could automatically diversify sovereign risk and at the same time – supposedly – involve no collective risks

whatsoever for the european community ( even in times of financial stress ), i am not convinced, however. in order for sbbs to function properly, quite a number of factors have to be considered. for example, collective risks which might emerge due to bridge financing or also guarantees need to be precluded. but i won ’ t go into all the constructional details. let me jump straight to the key argument with respect to the sovereign - bank - nexus : sbbs will not function without the aforementioned reforms of sovereign exposures in the regulatory rules for banks. so this is a necessary precondition. given the current privileges for sovereign bonds in capital requirements calculations of banks, they have strong incentives to buy these bonds directly. for sbbs, there would not be any such regulatory privileges and thus a market for sbbs would not emerge. 3 / 6 bis central bankers'speeches now some have called for a comparable privilege of sbbs in banking regulation. but this is no option, either : if we want regulation to be risk - adequate – which means it needs to take into account the non - zero risk of government default – this has to pertain to any financing instrument for sovereigns, including sbbs. otherwise we would have merely relocated financial stability risks. these securities, then, do not offer an easy way out. 3. more than rules : rigorously target high - priority risks sometimes it seems that all that representatives from german institutions have to say about europe is that it needs to adhere to a strong set of rules, and that rules need to ensure that those who are in control of risks and opportunities also bear the consequences. i have two things to say about this. to start out with : i am a strong proponent of these ideas. as abstract as they may sound in a speech, a lot of empirical evidence and day - to - day wisdom went into them. the second is : europe ’ s future does indeed require more than a well - balanced architecture. in the following, i will concentrate on those other fields. first and foremost, we have to rigorously target the risks we are already aware of. and those who are familiar with ssm supervisory priorities will know that i am about to speak on the issue of non - performing loans, or npls for short. my point here is this. the european supervisors should, in my view, not hesitate to vigorously pursue this issue and to address it as soon as possible. not only because it remains a threat to the