Chart 1 shows the total assets of the financial institutions of Germany, France, Italy and Spain, relative to their position in 2004. A notable acceleration of expanding balance sheets is found in European financial institutions, except for German ones. Here the grand experiment of the euro played a pivotal role.
Based on the European Union’s financial services directives, a single market was being formed in terms of financial markets and financial business in general. Competition intensified among financial institutions, and this squeezed their profits. A remarkable convergence of sovereign interest rates highlighted declining risk premiums in financial markets (Chart 2), though in retrospect this proved  2  BIS central bankers’ speeches  unsustainable.