Under current bank capital regulations, exposures of banks to sovereign debtors in the country’s own currency are assigned a risk weight of zero. In addition, these claims are exempted from limits on large exposures that would otherwise apply to large exposures to non-sovereign entities. Similar exemptions apply to liquidity regulations.
Yet, claims on governments are not immune to the risk of default or of illiquidity. c) Implicit Subsidies and Systemic Risk Implicit guarantees for liabilities of ﬁnancial institutions are a key channel through which private and public debt are linked. They are contingent liabilities for the government which can turn into explicit payment obligations in times of crisis.