I will close by briefly linking this discussion to recent Federal Reserve policy. As a professor and textbook author, I was accustomed to discussing the effects of a particular phenomenon, such as rising oil prices, with all other factors held equal. However, as policymakers know, everything else is never held equal. The increases in oil prices this year did not take place in isolation.
Finally, the European Stability Mechanism was established. Second, tightening regulatory standards on sovereign exposures can hardly be sufficient to safeguard banks against their domestic sovereign default. Direct exposures are just one of the channels that transmit sovereign risk to the domestic banking system.