italy, ireland, portugal, and spain, or giips ) increased significantly during and after the crisis. moreover, the increased exposure of banks to sovereign debts exhibited a domestic bias in case of the riskier sovereigns, i. e., the giips, with share of resident banks increasing while that of non - residents declining ; the holdings of resident banks continue to be at a high level ( chart 1 ). 1 / 12 bis central bankers'speeches the large holdings of domestic sovereign debt by banks played a key role in exacerbating the sovereign debt crisis in peripheral european countries. from january 2007 until the first bank bailout announcement in late september 2008, there was a sustained rise in bank credit spreads while sovereign credit spreads remained low. during september - october 2008, bank bailouts became a pervasive feature across developed economies and there was a significant decline in bank credit spreads with a corresponding increase in sovereign credit spreads. in effect, bank bailouts transferred credit risk from the financial sector to the sovereigns ( acharya, drechsler and schnabl, 2012 ; 2015 ). however, and especially post the greek default in 2010, sovereign spreads in the giips widened too over the german bunds due to macroeconomic concerns in the european periphery, causing significant valuation losses for banks and casting doubt on their solvency. 2 / 12 bis central bankers'speeches concomitantly, rising yields on sovereign bonds enticed banks to stock up on their domestic sovereign exposures. with continuing access to short - term funding, notably in deposit and money markets, banks in giips and even some non - giips countries increased investments in giips sovereign bonds so as to purchase “ carry ” over the german bunds, hoping for future convergence of yield ( acharya and steffen, 2015 ). this “ carry trade ” was particularly attractive for under - capitalized banks as a way to gamble for resurrection, effectively chasing quick treasury gains with no additional capital requirement, but doubling up on economic risks if the carry were to widen even further... and it did. the greek default and ensuing sovereign debt crises in the giips countries showed that banks having significant exposures to sovereign debt were the most susceptible to fluctuations in sovereign borrowing costs and faced attendant market plus funding consequences. such sovereign debt - bank nexus creates a two - way feedback loop. as banks are highly exposed to the domestic sovereign, any adverse movement in yields or

financial stability report no. 14 ( 2 ) / 2017 liviu voinea, deputy governor press conference, bucharest, 4 december 2017 your excellences, dear colleagues, dear guests, thank you for your presence at the launch of the december 2017 issue of the financial stability report, no. 14 ( 2 ) / 2017. right beside me are three nbr directors who are ready to answer your questions : mr eugen radulescu, director of the financial stability department, which prepared the report – i wish to thank all the colleagues involved ; mr emil vonvea, director of the bank resolution department – an area having the role to strengthen confidence in the banking sector – the report also includes a section dedicated to resolution strategies ; and mr tudor grosu, director of the macroeconomic modelling and forecasting department, as part of the analyses in the report are based on scenarios and econometric models to the development of which his department also contributed. i would like to thank the other departments which cooperated in the preparation of the report, particularly the economic studies department for the translation. this is the 14th financial stability report launched by the national bank of romania. i would like to point out that the report we are releasing today has been discussed in two meetings of the nbr board and was unanimously approved by the nbr board in its meeting of 27 november 2017. the report presents the risks to financial stability, in close correlation with domestic and international economic developments. financial stability is a public good which refers not only to banks, but also to the economy as a whole. financial stability is influenced by the quality of the public policy mix. since the previous report ( may 2017 ), financial stability has remained robust, yet we notice that certain vulnerabilities are still manifest or have been building up, especially with regard to upward pressures on the risk premium for emerging economies, tensions surrounding domestic macroeconomic equilibria stemming from slippages and uncertainty in the budgetary and fiscal policy and higher household indebtedness, the risks being compounded by the correlation between these factors. looking at macroeconomic fundamentals, several favourable indicators are noteworthy : romania ’ s major advantage is the low public debt stock ( 37. 4 percent of gdp ), together with the drop in the refinancing risk, due mainly to the extension in the maturity of public debt ( figures 1 and 2 ). public debt spans mostly the medium or long term ( 94 percent of total, on the domestic and