Preparing for the Next Financial Crisis

Capital and liquidity standards 157

which encourages banks to hold sovereign debt. Finally, sovereign exposures

are exempted from the large- exposure regime, whereby a bank cannot be

exposed to more than 25% of its eligible capital on the same beneciary or

group of related beneciaries.

Such exemptions are supposed to take into account the taxation power

of the government. However, local authorities would have less room to

increase taxes. In addition, the European crisis provided evidence of the

“bank- sovereign nexus”. In that regard, proposals have been made to miti-

gate this “nexus” (Chapter 9).

With the exception of sovereign risk, which has not been dealt with so far, these

uncertainties have been addressed in the Basel III reform.

6.3 ...