crisis and are still having to do so to a certain extent today. it was also the reason why the eurosystem launched purchase programmes for crisis countries ’ government bonds. 5. disentangling the gordian knot : the sovereign - bank nexus a no - bail - out clause will only ever be credible if it is possible to restructure government bonds without jeopardising financial stability. but by the same token, this means putting an end, once and for all, to the tight sovereign - bank nexus that still persists in many euro - area countries. this nexus primarily comes about when a country ’ s banks hold huge amounts of government bonds in their books. the bundesbank was quick to point out that the preferential regulatory treatment afforded to government bonds plays a major role in this regard. under the current regime, banks are not required to set aside any capital against exposures to euro - area sovereigns, but they are for loans to enterprises or households. nor are there any caps or ceilings on their lending to these borrowers. banks, therefore, have a huge incentive to invest in government bonds, at least in the short term. sovereigns likewise stand to benefit in the short run since they can raise funding relatively easily thanks to the artificially inflated demand for government bonds – yet at the same time this lessens the pressure on them to consolidate government finances and to reduce their debt to sensible levels. however, the crisis made it more than clear that even euro - area countries ’ government bonds can be exposed to risk. this is why, in my view, capital requirements need to be extended to cover banks ’ on - balance - sheet lending to sovereigns according to their risks. also, i still think it makes sense to cap banks ’ exposures to individual sovereigns – much like the large exposure limits that exist for private sector borrowers. that way, even if those sovereigns were to default, banks would still be sufficiently capitalised. 4 / 5 bis central bankers'speeches if the preferential regulatory treatment afforded to sovereign debt were done away with, this would also increase investors ’ incentives to take greater account of the differing risk profiles of the individual states, which in turn would strengthen the disciplinary function of capital markets. countries that pursue unsustainable fiscal policies would then have to pay higher interest rates on their debts. so the area where political action is needed has been staked out – now it ’ s up to the eu to demonstrate that it is

hailed as a reliable partner, perhaps even a role model, for many people in europe and beyond. saying that, i certainly do not wish to ignore the fact that the past few years have been difficult for many people and that challenges still lie ahead of us today. even though germany did not bear the brunt of the euro crisis, it has nevertheless clearly left its mark here, too. many people are looking to the future with an acute sense of concern and uncertainty. quo vadis europe, quo vadis euro? how will we manage to cope with the large influx of refugees to our country and find good ways of living together? these are all questions that people in germany, in munster, are 1 / 5 bis central bankers'speeches asking. and they deserve honest answers. but one thing is very important to me : for all the challenges we face, the path we have taken over the past 26 years is a clear path, the right path. germany is moving towards unity, towards integration. we are certainly not glossing over matters when we say that germany has grown ever closer over the last 26 years. that ’ s something we can be grateful for and we must press ahead on this path, with all the energy and commitment we can muster. 3. sliding back into crisis? : european integration looking beyond germany ’ s borders to europe gives me much greater cause for concern, for there i see a continent, our continent, facing a crucial test. for me, matters came to a head when the uk recently decided to no longer be a member of the european union. in my eyes, brexit is more than just a manifestation of euroscepticism in the uk – it is primarily a sign of deep uncertainty surrounding the european project – and that ’ s certainly not confined to the uk. “ europe does not grow out of treaties, it grows out of the hearts of its citizens, or not at all. ” this is how former german foreign minister, klaus kinkel, put it back in 1992. he was right then and he is right now. the european union may well have made important projects such as the euro, the schengen zone or the common foreign and security policy a reality, but today there is deep mistrust of “ the elites in brussels ", unfortunately. in all these years, europe hasn ’ t managed to reach people ’ s hearts. besides the current challenges – besides brexit, i ’ m thinking of topics such as the influx of