The reason is that public insurance guarantees that costs will be shared in the event of bank failures, which is crucial for national authorities to let capital and liquidity flow freely within the monetary union. Without insurance, on the other hand, there will always be an incentive to ring-fence in order to safeguard national balance sheets, which blocks effective risk sharing.
[25] US banks, for instance, rely on intra-group funding to respond to local shocks and manage credit growth, allowing them to keep their lending more stable over the cycle. [26] Similarly, without public insurance, banks have a weaker business case to engage in cross-border consolidation.