Despite generally stronger interdependencies, the extent to which these might give rise to challenges in the future differs across the euro area. Banks in more highly indebted countries also tend to exhibit higher domestic sovereign exposures and higher corporate NPL ratios. To a large extent, this reflects unresolved legacy issues with respect to the banking sector and sovereign indebtedness (Chart 9).
For example, in terms of banks’ capital, an internationally common new regulatory framework, namely, Basel III, has recently been agreed on. Both the quality and the quantity of bank’s capital will be enhanced, albeit gradually, through increasing the ratios of common equities and Tier I that have a high loss absorbing capacity at the time of bankruptcy.