##s are not the only instruments which swiss cantons and local governments use to strike a balance between control and liability. another crucial element in their fiscal policy toolkit is the no bail - out regime for local governments. 2 but up until ten years ago, no one was quite sure whether a canton really was exempt from the obligation to bail out an insolvent municipality within its jurisdiction. the answer to this question came in the court ruling handed down in the leukerbad case, which stated that the canton in question, valais, was not obliged to bail out its highly indebted municipality leukerbad. ever since, the financial markets have also acknowledged the no bail - out regime as a credible policy, as indicated, amongst other things, by the fact that yields on bonds issued by cantons which are home to municipalities facing financial problems have dropped since the court ruling. yet how can the principle of individual fiscal responsibility be reinforced among the member states of the euro area? it is a journey which begins in basel, or, to be more precise, with the kirchgassner, gebhard ( 2013 ) : fiscal institutions at the cantonal level in switzerland university of st. gallen discussion paper no. 2013 – 04. feld, lars p, a kalb, m - d moessinger and s osterloh ( 2013 ), sovereign, bond market reactions to fiscal rules and no - bailout clauses : the swiss experience, centre for european economic research ( zew ), discussion paper no. 13 – 034. bis central bankers ’ speeches preferential regulatory treatment afforded to sovereign bonds. as i mentioned earlier in my speech, this preferential treatment not only sends out conflicting signals about whether a sovereign insolvency is even a permissible concept for legislators. it also makes such a scenario appear unrealistic not least because a sovereign default without appropriate capital buffers at banks would quite likely trigger a financial crisis. so first, government bonds should be adequately backed with capital, and second, banks should hold loans to individual sovereign debtors only up to a certain level. in a nutshell, over a medium - term horizon, government bonds need to be treated just like other bonds or loans to enterprises. from a financial stability perspective, particular problems are posed by the fact that banks often only hold government bonds issued by a single country in their books – those of their home country. the consequences of this are two - fold. not only do banks

on how the qualification for u. s. banks for basel ii would proceed and how much flexibility supervisors would apply when assessing compliance with the rules and related supervisory guidance, and i believe that such clarification is important. one major concern raised in the comments is that the proposals differ markedly in certain respects from the basel committee's revised accord, first issued in june 2004 and updated in 2005, and now commonly known as the " mid - year text. " although the u. s. proposals do diverge in a number of ways from the versions of basel ii being adopted in europe and other industrialized countries, many of these divergences are in fact consistent with the national discretion built into the framework and used in most other countries. the u. s. proposals also included other divergences to adapt the international framework to the unique aspects of the u. s. banking system, to address issues raised through the earlier public comment process, and to ensure a safe and sound transition to basel ii. but many emphasized the need for less variance in basel ii across countries. concerns about having to meet multiple versions of basel ii across countries are certainly reasonable ones, and i take these concerns quite seriously. i believe basel ii implementation in the united states should proceed in a manner that enhances consistency with implementation in other countries ; basel ii is intended, after all, to be an international framework for internationally active banks. at the same time, the framework needs to accommodate robust u. s. supervisory practices and the unique aspects of our financial markets. i also believe that we have an obligation to retain only those divergences for which we are convinced the regulatory benefits exceed the implementation burden and costs. some commenters also raised concerns about the complexity of the basel ii proposal. yes, the basel ii advanced approaches are complex, but this reflects how complex our largest financial institutions have become. to be effective, risk - management practices have evolved in order to support the increasingly sophisticated services, business practices, and organizational structures of large, internationally active financial institutions. hence, these banks already employ sophisticated risk - management practices and internal economic capital models. i fully support our proposal to review carefully these practices and models, among other factors, before granting the required supervisory approval for individual banks to use the advanced approaches of basel ii. determining the right level of complexity for u. s. basel ii rules remains an issue. while many bankers support the issuance of so - called principles - based regulations, some bankers have expressed a desire