At the same time, additional reforms can contribute to further increase the resilience of the European financial system and to enhance the consistency of the new institutional framework (Deutsche Bundesbank 2014a): Limiting banks’ exposures to sovereign risk: The Banking Union has no direct implications for the prudential regulations of banks.
Most importantly, it does not address the regulatory treatment of banks’ exposure to sovereign risk. Under current prudential regulations, sovereign debt is treated as risk-free when calculating banks’ capital requirements, and large exposure limits do not apply. This creates incentives for banks to hold exposures vis-à-vis governments with potential negative implications for private sector lending and financial stability.