In the US, by contrast, the role of banks in firms’ external finance is only about one-third or even less. Hence, a banking union is crucial also for the euro area real economy. But, it can reasonably be asked, if a banking union is so important, why did this only become apparent in the last few years?
The main reason is that the potential for financial fragmentation in the euro area was not recognised. Policy-makers and observers did not fully appreciate the extent to which diverging fundamentals between different economies could feed through to the banking system. This applies notably to sovereign debt, and the two-way interaction between sovereign distress and bank distress.