The European Parliament commissioned this paper and published it on November 10. Building up on earlier work in various public policy formats, I make a proposal on how to address the vexing problem of the high home bias in euro-area banks' exposures to euro-area sovereigns. The proposal is detailed with a specific calibration and transitional arrangements, designed to create the desired incentives while avoiding any risk of market disruption. Sovereign exposures, and the home bias problem, are major components of the ongoing debate about completing Europe's banking union.
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