nexus fails to consider that this is primarily sustained through channels other than direct exposures. the main channel is the real economy ; a sharp rise in the perceived risk of one state ’ s debt can quickly trigger a recessive spiral, kindling social tensions with unpredictable results. the blow to the banking system would be severe, irrespective of its capitalization and direct exposure. nor is there any evidence that the benefits associated with a reform of the prudential treatment of sovereign exposures outweigh the costs, or that the associated reduction in risk could be achieved by simply shifting the public debt securities from banks to other holders. only a combination of prudent budgetary policies and credible, growth - oriented structural reforms can simultaneously drive a sustained increase in lending and a reduction in public sector securities on banks ’ balance sheets. the governor ’ s concluding remarks annual report 2018 banca d ’ italia the euro summit held last december reached an agreement on strengthening the european stability mechanism ’ s role in managing and preventing crises in euro - area member states. the conditions that countries must respect to access the esm ’ s precautionary funding instruments were specified and cooperation procedures agreed between the esm and the commission for monitoring the public accounts of the member states. to reduce uncertainty as to how and when a sovereign debt can be restructured, the summit also decided to introduce ‘ single limb ’ collective action clauses ( cacs ) in euro - area government bonds by 2022 and that, if requested by the member state, the esm could facilitate the dialogue between that state and private investors. this uncertainty, however, only contributes to a small extent to the cost of a possible insolvency crisis. given the close economic and financial ties between the euro - area countries, the effects of a crisis of this kind would be serious and unpredictable not only for the country directly involved, but also for the others. europe should seek ways to support the efforts that must be made by member states to reduce their debt. rigorous and prudent budgetary policies are indispensable, but the lowering of the debt - to - gdp ratio is a necessarily long process, which could be disrupted by events outside the control of individual governments ; this is why some form of supranational insurance is needed, for example through the creation of a european debt redemption fund financed by dedicated resources of the participating countries. the heated debate on npls and sovereign exposures tends to overlook other significant risks to which banks

. to make the transition to the new rules easier for banks, the bank of italy will set up a help desk to explain how the rules are to be interpreted and to ensure that intermediaries implement management policies consistent with achievement of the new requirements. basel iii will make the banks stronger, but it does not address the question of the risks posed by systemically important financial institutions ( sifis ), whose size or presence in the most important financial nerve centres means they would be rescued at any cost if they were about to fail. at the next g20 summit, the financial stability board will submit a set of proposals for the creation of an institutional and regulatory environment within which sifis will be better able to absorb very large losses without going into a full - blown crisis and governments can allow them to fail when necessary. these proposals, endorsed by g20 finance ministers and central bank governors at the recent meeting in seoul, are based on four pillars : i ) institutional arrangements should be adopted in all countries that will allow sifis to be resolved without the global financial system running severe risks and without having recourse to taxpayer money, as happened for the desperate rescues of the last few years. the national laws that hinder international cooperation today must be amended ; agreements between home and host authorities must be drawn up, with roles and responsibilities clearly defined. under italian law the bank of italy already has sufficient instruments at its disposal ; only a few adjustments will be required to transpose the international recommendations. in particular, the supervisory authority must be empowered to set up bridge banks to which the assets and liabilities of a troubled institution can be temporarily transferred, to ensure continuity of operations pending its disposal on the market. ii ) sifis, especially those operating at global level, will need to have capital or other instruments equally capable of absorbing losses available in amounts greater than those laid down by the basel iii standards. shareholders – and in some cases bondholders as well – must be asked to shoulder some of the losses in difficult times ; among other things this would strengthen both market discipline and investor scrutiny of management decisions. it is therefore possible to envisage the introduction of more severe capital requirements than those imposed on non - systemic intermediaries, debt instruments that would automatically convert to capital when banks ’ ratios fall below a certain safety threshold ( contingent capital ), reductions ( haircuts ) for some creditors in the face value of debt during a crisis ( bail - in ). iii ) supervision of si