Government bonds are usually seen as an asset class with low credit and liquidity risk. One of the reasons is that the central government has powers to raise taxes. However, this does not mean that government bonds are risk-free. History has several examples of sovereign states that have defaulted on their payment obligations. In financial regulation, government bonds are in several respects treated as if they were risk-free. Regulation affects banks’ behaviour, and failure to take the risks on certain assets into account may distort the banks’ investment decisions. Hence, regulation may give banks an incentive to make disproportionately large investments in government bonds. Special treatment of government bonds applies when calculating risk weights, in the regulation of large exposures and in the new liquidity regulation. At the same time, many banks apply accounting policies whereby unrealised losses on government bonds are not fully reflected in the financial statements or the regulatory capital. This reduces transparency and may contribute to uncertainty about the robustness of banks at times when the markets for government bonds are stressed.[...]