And this sovereign-bank nexus, in turn, affects the ex-ante likelihood of a European deposit insurance scheme becoming involved. In order to improve the current situation, a crucial element has to do with current incentives contained in banking regulation.
At present, sovereign bonds from member states of the euro 3/5  BIS central bankers' speeches  area have a zero risk weight under the capital requirements regime. Essentially, this means that the economic risk attached to sovereign debt (which is larger than zero) is not reflected in capital requirements. Nor is there any upper limit for exposures to specific sovereigns.