##ation. the geographical segmentation is reflected in european banks ’ reliance on eurosystem refinancing. after the lehman insolvency, this reliance initially increased in most countries as risk aversion rose. later, segmentation developed differently across countries, reflecting the perceived riskiness of each country. more recently, the eurosystem policy to mitigate market segmentation and to safeguard an appropriate monetary policy transmission, namely by announcing outright monetary transactions ( omts ), is mirrored in reduced country differences. but this is no justification for the omts. it has eased market tensions, especially redomination risk. nonetheless, the bundesbank ’ s concerns are still extremely relevant. country differences regarding the reliance on eurosystem refinancing remain large, as indicated by the share of banks ’ balance sheets that is financed by eurosystem liquidity. this has also become obvious in the structure of early repayments of the three - year ltros. it has mainly been banks located in the core countries that have reduced outstanding volumes. furthermore, the reliance on national counterparties has increased. over the last few years, euro - area cross - border activity has declined constantly. 3. regulatory changes as reaction to the crisis and their impact on market structure and banking the experience of the recent financial crisis has triggered regulatory changes, especially in the banking sector. the new basel iii banking standards will address some of the root causes of the financial crisis and aim to prevent another build - up of liquidity and solvency risks. the basel iii framework for liquidity risk regulation encompasses two ratios – the liquidity coverage ratio ( lcr ) and the net stable funding ratio ( nsfr ). both will have an impact on how banks manage their business activities. as the lcr will be introduced earlier and the details are far more developed, i will discuss its impact on euro money markets. however, the lcr might yet be revised before its final implementation. with regard to the assets side of a bank ’ s balance sheet, a bank will primarily purchase high quality liquid assets ( hqla ) to improve lcr compliance. holding these assets outright will improve the lcr. demand for these assets is likely to increase, potentially causing them to trade at a premium. this regulatory - driven additional demand might reduce appetite for lower - quality liquid assets. turning to the liabilities side, banks with an lcr of below one will need to substitute shortterm for longer - term funding. this could

to be justified. they reflect diverging fundamentals in different countries – ie the different economic situation and levels of public debt. it is questionable whether the convergence of yields in the years before the crisis reflected the right assessment of the various risks underlying these investments. currently, refinancing conditions for the peripheral countries have improved notably. hence, omt will hopefully never have to be activated. however, market sentiment can change very quickly. in january 2010, greece received offers of about eur 25 billion for its five - year government bond issue with a volume of eur 8 billion. a couple of weeks later, greece was no longer able to refinance its liabilities via the capital market. although there are currently small improvements in gdp growth in several european countries, the risk of renewed tensions in sovereign debt markets is still alive given low growth and the slow implementation of reforms on the one hand and the expected tapering of the fed ’ s quantitative easing programme on the other hand. lower investor confidence, besides sending european government bond yields and cds premia higher in the secondary markets, has also impacted the primary markets. the space left by external creditors was occupied by domestic investors such as banks, who increased their investments particularly following the introduction of the three - year ltros. the trend towards renationalisation is a development that needs to be monitored. it reinforces the interdependence of the sovereign sector and the domestic banking system. european banks often only invest in the sovereign bonds of their home countries. credit institutions must increase their risk awareness in terms of sovereign bonds. on the one hand, banks should have credit limits for individual countries. this would reduce dependencies on certain debtors. on the other hand, these bonds have to be secured by a sufficient level of equity. in the medium term, government bonds should be treated like corporate bonds. experience has taught us that sovereign bonds are not a risk - free asset. furthermore, risk - appropriate treatment would lead to increasing yields of countries with unsound finances. therefore, market regulation would provide an incentive for fiscal discipline. the current initiative to establish an effective single supervisory mechanism is a step in the right direction. it will help us to identify risks at an earlier stage and is therefore also important for disentangling the critical link between sovereign and bank funding. however, the banking union, consisting of a sound single supervisory mechanism and single resolution mechanism, is a future project to prevent future problems. existing burdens have to be