First, we have seen that over-exposure to sovereign risk can undermine banks’ financial health and business viability in times when sovereign credit risk surges. This clearly advocates finding ways in which regulation can discourage overextension by banks to sovereign risk, but I would say country risk more generally, with a view to moderating concentration risk on banks’ balance sheets.
Second, we need to keep in mind that sovereign securities perform a well-defined function in banks’ business activities, as they provide liquidity and hedging services for banks while guaranteeing some positive carry, at least in Spain.