ABSTRACT
Chapter 3 explores the extent to which the European Banking Union constitutes an optimal policy response from the perspective of breaking the vicious circle connecting banks to their sovereigns; it enquires into the role of enhanced fiscal surveillance as a means of closing the second channel of contagion; in particular, it examines the challenges posed by a possible revision of the regulatory treatment of commercial banks’ sovereign debt holdings, and it explains how safe assets and Eurobonds could contribute to breaking the sovereign–banks loop.
