Yet this mechanism hardly worked during the crisis in the euro area. Even worse: Depositors in crisis-hit countries lost confidence in their domestic banking systems and withdrew their deposits. Banks in the euro area also lost confidence in each other and reined in their lending. The Banking Union was created in part to overcome the financial fragmentation triggered by the sovereign debt crisis.
With its Single Supervisory Mechanism and rules on bailing-in creditors in the event of bank failures, the Banking Union bolsters the banking sector’s resilience. This makes a loss of confidence in national banking systems less likely. And less danger of a fragmented financial system stabilises cross-border lending, particularly in turbulent times. A common European deposit guarantee scheme could, in theory, even heighten this confidence.