whatsoever for the european community ( even in times of financial stress ), i am not convinced, however. in order for sbbs to function properly, quite a number of factors have to be considered. for example, collective risks which might emerge due to bridge financing or also guarantees need to be precluded. but i won ’ t go into all the constructional details. let me jump straight to the key argument with respect to the sovereign - bank - nexus : sbbs will not function without the aforementioned reforms of sovereign exposures in the regulatory rules for banks. so this is a necessary precondition. given the current privileges for sovereign bonds in capital requirements calculations of banks, they have strong incentives to buy these bonds directly. for sbbs, there would not be any such regulatory privileges and thus a market for sbbs would not emerge. 3 / 6 bis central bankers'speeches now some have called for a comparable privilege of sbbs in banking regulation. but this is no option, either : if we want regulation to be risk - adequate – which means it needs to take into account the non - zero risk of government default – this has to pertain to any financing instrument for sovereigns, including sbbs. otherwise we would have merely relocated financial stability risks. these securities, then, do not offer an easy way out. 3. more than rules : rigorously target high - priority risks sometimes it seems that all that representatives from german institutions have to say about europe is that it needs to adhere to a strong set of rules, and that rules need to ensure that those who are in control of risks and opportunities also bear the consequences. i have two things to say about this. to start out with : i am a strong proponent of these ideas. as abstract as they may sound in a speech, a lot of empirical evidence and day - to - day wisdom went into them. the second is : europe ’ s future does indeed require more than a well - balanced architecture. in the following, i will concentrate on those other fields. first and foremost, we have to rigorously target the risks we are already aware of. and those who are familiar with ssm supervisory priorities will know that i am about to speak on the issue of non - performing loans, or npls for short. my point here is this. the european supervisors should, in my view, not hesitate to vigorously pursue this issue and to address it as soon as possible. not only because it remains a threat to the

to the quality of the underlying data and the assumptions used in the exercise. see, for instance, roubini, 2002. bis central bankers ’ speeches the third feature that generally sets sovereign and corporate debt workouts apart is the externalities they may generate. a debt restructuring of a sovereign may have severe implications, both for the debtor ’ s and the creditor ’ s economies. most of the experience in this area has involved less developed countries. in these cases private sector involvement has largely been a concern for foreign creditors. taxpayers in creditor countries were affected, depending on the size of the exposure of their respective financial system and on whether the soundness of that system was jeopardised. measures have been used in the past to try to reduce this impact, in particular through regulatory forbearance. one example is the prudential measures which, during the 1980s, permitted us banks to book brady bonds at their nominal value. historical experience has also rejected the panglossian view that there exists such a thing as an orderly debt restructuring. while some restructurings have indeed been successful and can arguably be said to have occurred in an orderly fashion, they were often on a small scale and executed under specific circumstances. the most striking and oft - quoted case is uruguay. however, more often than not, restructurings have been disorderly, harmful and fraught with difficulties. the average length of the negotiations is 2½ years6 and it can vary greatly. in some cases, negotiations have taken just a few months ( for instance, uruguay in 2003, pakistan in 1999, chile in 1990 and romania in 1983 ) ; in other cases they have taken many years ( for instance, vietnam from 1982 until 1998, jordan from 1989 to 1993, peru from 1983 to 1997 and argentina more recently ). empirical evidence also shows that private investors are likely to penalise a country which has a history of restructuring and to demand higher risk premia. 7 when considering a euro area economy, the following points should be kept in mind. first, the domestic financial market would be severely affected by a default / restructuring of the public debt. large losses would have to be accounted for, as no forbearance would be possible, and recapitalisation of the domestic banking system would require additional public money. second, given the role of the state as implicit guarantor of many financial and economic transactions, the impact on the real wealth of the domestic population and on the economy would be substantial