March 20, 2012 / 2:02 PM / 5 years ago

CORRECTED-Weidmann - must break bank, sovereign debt nexus

(Adds dropped word "not" in final paragraph)

FRANKFURT, March 20 (Reuters) - The euro zone needs to address the problem of banks being overloaded with sovereign debt from their home countries, European Central Bank policymaker Jens Weidmann said on Tuesday.

Weidmann, who also heads the influential Bundesbank, said the problem had been one of the key drivers of the euro zone debt crisis as it had created a tie that dragged banks down when sovereign debt prices plunged, which in turn increased the pressure on the countries themselves.

"We need to know more about how to best address this sovereign bank nexus," Weidmann said in a speech at the Frankfurt Finance Summit

"An important channel of contagion has been the heavy concentration of sovereign debt at the respective national banks. When risk perceptions started to change, banks holding large amounts of distressed sovereign debt became a severe burden on financial stability."

Weidmann made no reference to future monetary policy in his speech, which mainly focused on shaping regulation to avoid future crises.

He added that he was "sceptical about correcting undesirable results in the financial markets by direct prohibition or by suppressing market activities," and said that while it was important for central banks to be involved in regulation, their role in it should not compromise their independence. (Reporting by Marc Jones)

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