it would be better still if the bail - in regime were to take effect at the time the srm starts – not one year later as is currently envisaged. the sovereign - bank nexus, however, works both ways. we also have to make sure that worsening public finances do not infect the financial system. the banking union still has a sovereign virus, as daniel gros from the centre for european policy studies put it. to strengthen the banking union ’ s immune system, we need to end the preferential treatment afforded to sovereign debt. at present, sovereign bonds are treated by european regulators as being risk - free – an assumption that stands in contradiction both to the no bail out clause and to recent history. we should therefore put this regulatory fiction to rest. hence, sovereign bonds should be adequately risk - weighted, and exposure to individual sovereign debt should be capped, as is already the case for private debt. an adequate risk - weighting of sovereign bonds would make banks more resilient if the fiscal position of the respective sovereign were to deteriorate. and it would bring spreads more into line with the underlying risk, thus sending 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 seem to neglect this principle. in many cases, european banks hold bonds from one sovereign only – their home country. during the crisis, many banks, particularly weak ones, used the low refinancing costs to buy even more sovereign debt ; they made a sort of “ carry trade ”. however, a high level of undiversified sovereign exposure is what makes sovereign default a potentially systemic event. hence, the large exposure regime which caps investments in a single debtor has to be applied correspondingly to sovereigns as well. this might trigger substantial repercussions, but these would be manageable if they were phased in over a transitional period – which would undoubtedly need to be granted. 5. the role of monetary policy consistently applying the stiffened rules and ending the preferential treatment afforded to sovereign debt will be instrumental in strengthening the stability of our monetary union. so will the banking union. currently, much of the support provided to the whole structure hinges on one pillar alone : monetary policy. but this will work only for so long ; monetary policy has already done a lot to absorb the

an objective of the single monetary policy. after all, an exchange rate target could very well come into conflict with the price stability mandate. all parties who are now raising the spectre of political exchange - rate targets need to be aware of this. in addition, a unilateral focus on exchange rates would also be difficult to conceive for the monetary policy of a large currency area, as targeted devaluation of the domestic currency could always trigger opposite reactions from other currency areas. this would end up leaving all countries involved worse off than before. however, the exchange rate – like other economic factors – is relevant to the eurosystem ’ s monetary policy inasmuch as exchange rate movements can impact on the movement of price levels within the single currency area. we are currently in the midst of a period of exceptionally low inflation in the euro area, which will probably last for some time to come. the ecb governing council will therefore also observe further exchange rate developments very carefully in its monetary policy decisions. in light of the public debate about the movement of the euro ’ s exchange rate, we must not overlook the fact that interest rates in government bond markets in the euro - area member states have dropped again considerably in the past few weeks. one of the factors behind this development seems to be that international investors are shifting their investment portfolios and increasingly returning their funds to euro - area countries. this also appears to include investments precisely in those countries hit particularly hard by the crisis. this change in capital investment patterns appears to have contributed to the rise in the euro ’ s external value while at the same time perceptibly easing funding conditions. the short - term dampening impact of a currency appreciation is offset by the positive growth effect created by more favourable funding conditions. over the medium to long term, the expansionary funding impact is likely to prevail. it would therefore be short - sighted to look only at exchange rate movements without taking into account the stimulating impacts of falling government bond yields. ladies and gentlemen, i, too, would like to take something into account : the time schedule. i have spoken a lot about confidence. i am therefore confident that you will forgive me if i ’ ve exceeded my allotted time limit somewhat. i hope you all have a successful symposium, in which you will obtain new knowledge from the various talks and have a lively exchange of information and opinions at the panel discussions. bis central bankers ’ speeches