ECB Working Paper No 844, December 2007  BIS central bankers’ speeches  5  In Germany, the government has presented draft legislation specifically designed to boost German banks’ bail-inable debt and steps in this direction are welcome. But if we want to sever the link between banks and sovereigns for good, we need to stop contagion from sovereigns to banks as well.
And this means ending the preferential regulatory treatment of sovereign debt. In the past, the call to end the preferential treatment of sovereign debt was dealt with in the same way as some people see taking out the garbage. We all know it has to be done some time, but for now, let’s pretend the chore doesn’t exist.