I cannot see a single good reason why banks should not have to back government bonds in their balance sheets by capital, but I see many reasons why they should – not least the objective of breaking the sovereign-bank nexus. Financial regulation that is consistent along these three dimensions will help to make the financial system a safer place.
However, while being a safer place in the aggregate, the financial system is not necessarily a safe place for individual banks. After all, we live in a market economy and creative destruction is a central element. Individual banks must be able to fail like any other enterprise. This must also hold for large banks which are often labelled “too big to fail”.