Governments then often have no option but to bail out these banks to prevent the system from collapsing. This costs a lot of money. Look at Ireland, for example: rescuing its banks raised the country’s 2010 budget deficit to more than 30% of GDP.
By the same token, if government finances run into difficulties, that causes problems for banks – firstly, because many banks have large government bond holdings and, secondly, because the general economic situation initially worsens when a government has to adjust its finances. This feedback loop between banks and sovereigns has to be severed in order to promote financial stability.