This means that the central bank’s efforts to stabilise the economy cannot work as effectively as they should. So not only will banks fail in their macroeconomic stabilisation efforts, they will also obstruct the efforts of monetary policy to play that role. In fact, this is what we saw during the crisis.
To avoid that happening again, we need a deeply integrated financial system with well-capitalised intermediaries that are active across borders and benefit from the risk diversification options that the economic diversity of the euro area offers. Sound risk diversification within the euro area financial system will make the task of monetary policy easier even when confronted with common shocks.