more into line with the underlying risk, thus giving a disciplining signal to the sovereign. but sovereign bonds pose a threat to financial stability not only because of preferential riskweighting. the most important rule in risk management is diversification. yet when it comes to sovereign bonds, banks all too often neglect this principle. in many cases, european banks hold bonds from one sovereign only – their home country. large and undiversified exposure is what makes a sovereign systemically relevant. hence, the large exposure regime which caps the investment in one single debtor has to be applied to sovereigns as well. only then will the failure of a part not equal the failure of the system as a whole. thank you. bis central bankers ’ speeches

andreas dombret : holistic approaches to solve the “ euro crisis ” speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the global economic symposium, kiel, 1 october 2013. * * * ladies and gentlemen, thank you for the invitation to this year ’ s global economic symposium ; it is a pleasure to be here. the “ euro crisis ” has certainly been, and it still is, a defining moment in the history of european monetary union – though i would add that we are dealing with a sovereign debt crisis rather than a crisis of the euro. let me kick off the discussion by offering some thoughts on how to solve the crisis. what we need is a holistic approach. since the european monetary union is a highly interdependent system, any solution must not only remedy the problem at hand but also improve the working of the system as a whole. unfortunately, many of the proposed solutions fall short of this requirement. instead, they are prone to what is known as the “ cobra effect ”. the cobra anecdote is set in colonial india. trying to stop a plague of cobras, the british government offered a bounty for every dead snake. the plan seemed to be working at first. high numbers of dead cobras were presented to the colonial administration. unfortunately, this did not get the plague under control. most of the dead cobras were not wild ones – they had been bred by enterprising locals in order to claim the bounty. when the governor finally caught wind of the practice, he scrapped the reward, causing the cobra breeders to set the now worthless snakes free. as a result, the plague was worse than ever. every policy not only addresses a problem, but changes the nature of the game as well. this has to be taken into account when evaluating the overall merit of any measure. and when we look beyond instant effects, many policies lose their lustre. eurobonds are a case in point. granted, eurobonds would offer temporary relief to heavily indebted member states of the euro area. but the introduction of eurobonds would distort the already lopsided balance between liability and control even further. while spending decisions would essentially remain a national prerogative, liability would become european. incentives to incur further debt would thus be strengthened, not weakened. this would strain rather than smooth the working of the system. only if common liability were matched by common control would incentives be