So first, government bonds should be adequately backed with capital, and second, banks should hold loans to individual sovereign debtors only up to a certain level. In a nutshell, over a medium-term horizon, government bonds need to be treated just like other bonds or loans to enterprises.
From a financial stability perspective, particular problems are posed by the fact that banks often only hold government bonds issued by a single country in their books – those of their home country. The consequences of this are two-fold. Not only do banks have no capital backing for these government bonds; their risk is also concentrated in just one country.