in place with clear bail - in rules of shareholders and creditors would help to shield the government from having to rescue banks with taxpayers ’ money. another crucial measure to cut the sovereign - banking nexus refers to the regulatory capital requirement regime for banks. one of the key lessons of the crisis was that sovereign bonds cannot per se be considered risk - free. we should therefore put this regulatory fiction to rest. 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. large and undiversified sovereign exposure is what makes sovereign default a potentially systemic event. hence, the large exposure regime which caps the investment in one single debtor has to be applied to sovereigns as well. without addressing the regulatory treatment of sovereign exposures, i see no reliable way of breaking the sovereign - banking nexus. in my view, such regulations are an indispensable prerequisite for a healthy financial system in the longer run. 4. conclusion ladies and gentlemen, let me now come to a close. the challenges i have just described make one thing very clear : safeguarding financial stability is truly a herculean task. it would therefore be an understandable reflex to summon all policies at our disposal towards that end. as d ’ artagnan, athos, porthos and aramis would have said : “ all for one, and one for all! ” but while indeed all the policies i have mentioned – microprudential, macroprudential, and monetary policy – have a role to play when it comes to securing financial stability, some restraint seems to be in order, especially with regard to monetary policy. monetary policy can influence financial conditions. notably, it can, to a certain extent, influence the risk - taking behaviour of the financial sector. a more symmetric monetary policy that looks through the financial cycle therefore seems appropriate. monetary policy has to counter financial imbalances inasmuch as they endanger price stability. but adopting financial stability as an additional monetary policy objective on a par with price stability overstates the accuracy and the effectiveness with which monetary policy can contribute to financial stability. and ultimately it runs the risk of harming credibility with regard to the pursuit of price stability, as this depends on both monetary policy clarity regarding its

weighted basel rules should be supplemented by an unweighted leverage ratio. in my opinion, that sounds sensible. to economists, parsimony is normally key when it comes both to economic modelling and to regulatory proposals. but in this special case, putting multiple safety measures in place might be justified, even necessary. what applies to power stations holds for the financial system as well. when the potential fallout is vast, redundancy, not parsimony, might be the better approach – a point, i am sure, we will have time to delve into further during tomorrow ’ s panel discussion on regulatory reforms. it is obvious, however, that stricter regulation for some institutions might shift business to less regulated players. regulators need to take this aspect of interconnectedness into account, too. the so - called shadow banking system can be a source of systemic risk because of unregulated liquidity and maturity transformation, the build - up of leverage, and procyclicality. the fsb published policy recommendations to address specific risks emanating from certain activities or institutions. in order to identify new risks in due time, the fsb has established a regular monitoring exercise. these are steps in the right direction. for the international recommendations to be effective, it is crucial to transpose them consistently into national law – and to do so quickly, given that this issue has been on the agenda for quite a while. in europe, for instance, we are already in the process of implementing international recommendations to regulate money market funds and to enhance the transparency of securities financing transactions. bis central bankers ’ speeches finally, there is yet another major aspect of interconnectedness that regulators have not taken into account up to now : the link between banks ’ balance sheets and public finances. the financial crisis has shown that if a systemically relevant bank or many banks simultaneously run into financial difficulties, the stability of the financial system is put at risk as a result. given the deficiencies of previous resolution regimes, governments often had no option but to step in and bail out banks to prevent the financial system from collapsing. in europe, however, the greek case in particular showed that the other way round can also be of relevance. difficulties in government finances might cause substantial problems for banks, in particular because many banks hold large portfolios of government bonds. from a financial stability viewpoint this vicious circle has to be broken. as i discussed earlier, resolution regimes for banks are important in this regard. having credible resolution frameworks