Until now, the insolvency of governments and systemically important banks has practically not been permitted because of the probably quite realistic fear that this would threaten the stability of the financial system in the whole euro area. So what ought to be done to ensure that insolvent governments and banks no longer represent a systemic risk in future?
Among other things, the disastrous sovereign-bank nexus would have to be broken. To ensure this, we must do the following. First, we must further strengthen the financial system’s resilience. Second, we must regulate the financial markets strictly and on the basis of uniform rules. Third, we must effectively implement a credible resolution regime for banks.