The deterioration of sovereign credit, on the one hand, and the clarification of the rules regarding bail-in of bank debt, on the other, have both helped to bring to an end a funding model that was neither desirable nor sustainable. The euro area banking system is therefore now undergoing a process of restructuring and deleveraging.
As this is a necessary correction, it is not a process that policymakers should seek to prevent. However, it is a process that needs to be properly managed. Deleveraging can essentially take two forms: a “good” form and a “bad” form.