Tougher prudential treatment of banks' sovereign exposures could "exacerbate the instability of the government securities markets and of banks' funding conditions," according to a working paper published by the Bank of Italy today.

In The negative feedback loop between banks and sovereigns, Paolo Angelini, Giuseppe Grande and Fabio Panetta note that, more than four years since the outbreak of the sovereign debt crisis in the eurozone, "the banking systems of several countries remain exposed to