regain responsibility for its own public finances. the government, parliament and electorate of each euro - area country must be bis central bankers ’ speeches responsible for ensuring that their economy is competitive and performs well, that the country generates growth and employment under its own steam, that its government finances are sustainable in the long term, and that excessive public deficits and debt are eliminated so that the country can absorb cyclical shocks without external assistance. far - reaching reforms are needed to achieve this level of stability. all this is challenging, but shouldn ’ t it really be a matter of course? after all, these are the prerequisites for a stable monetary union. to achieve these aims, to set the right incentives for sound policymaking, we need to lend more weight to the no bail - out principle again. the collective action clauses on recently issued government bonds are a step in the right direction, enabling a bail - in of bond creditors in the event of serious solvency problems. only then will the market have a disciplining effect on government budgets. but as the crisis has shown, the success of this approach of national responsibility hinges on one condition : ensuring that public finance problems do not derail the whole financial system. two things can at least help to ensure that this condition is fulfilled : in the medium term, banks should be obliged to set aside sufficient capital to back government bonds, and they should also be subject to limits on large exposures to governments. such limits have been applied as standard to corporate loans for a long time now. this would make banks more resilient to public finance problems, encouraging them to adjust their demand for government bonds more closely to the level of risk involved. any government with an unsound fiscal policy would face rising interest rates on its bonds. kenneth rogoff, former chief economist at the imf, even views adequate capital backing for government bonds as a far more effective debt brake than the rules of the fiscal compact. incidentally, putting an end to preferential treatment of government debt over corporate loans would also make lending to enterprises more attractive again. and you could all benefit from that, even though there are currently no signs of constraints on lending to enterprises in germany. quite the opposite : credit standards for corporate loans were actually loosened slightly in the first quarter of 2013. however, bank balance sheets don ’ t just reflect government finances but also developments in the real economy. the reforms i ’ ve described will therefore also make the banking system more stable. the

andreas dombret : cutting the gordian knot or splitting hairs – the debate about breaking up the banks speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the ilf ( institute for law and finance ) conference “ too big to fail iii : structural reform proposals – should we break up the banks? ”, frankfurt am main, 21 january 2014. * 1. * * introduction ladies and gentlemen thank you for inviting me to speak at today ’ s conference. it is a pleasure and an honour to be here. the story goes that at some point in history the kingdom of phrygia was without a king. the priests therefore consulted an oracle to determine who should fill the vacant position. the oracle decreed that the next man to enter the city in an ox cart should become the new king. that man was gordias, a peasant. gordias became the king of phrygia and, out of gratitude, his son dedicated the ox cart to the gods. the gods in turn tied the cart to a pole with a complicated knot – the famous gordian knot. this knot was so complex that for centuries no one was able to untie it. hence, the cart was still tied to its pole when alexander the great entered the scene in 400 bc. meanwhile, it had been prophesied that whoever untied the knot would become king of asia. alexander, full of ambition, took on the challenge. unable to find the loose end of the knot, he drew his sword and sliced the knot in two, thereby undoing it. since then, the gordian knot has become a symbol for solving seemingly insoluble problems by thinking outside the box and then taking bold action. the insoluble problem in our case is how to secure financial stability. and after six years of crisis, more and more people are, understandably, looking for a gordian solution. to some, the solution would be to break up the banks – with one bold stroke of the sword, as it were. broadly speaking, the dividing line would run between those parts of a bank engaged in commercial banking and those parts engaged in investment banking. in my speech today, i will address the question of whether this is a sensible approach. as i speak first at this conference, my objective is to give an overview of the issue, discuss the pros and cons of the proposal and try to draw a tentative