As banks are highly exposed to the domestic sovereign, any adverse movement in yields or materialisation of a sovereign event could trigger bank under-capitalization and bailouts, which imply further sovereign borrowing and rising sovereign yields, leading to further erosion of bank capital and need for further bailouts, and so on (Acharya, Drechsler and Schnabl, 2012; 2015).
We believe this approach provides a path to resolution for financial firms in a way that both mitigates risk to the financial system and protects taxpayers.