Cleaning up the banking sector Prior to the crisis, euro area banks had entered a rapid period of balance sheet expansion. From the start of that expansion in 2005 to its peak in 2012, banks assets increased by more than 60 percentage points of GDP. This was associated with the development of unsustainable bank business models.
Banks relied too much on debt to finance their lending, and that debt depended too much on wholesale market funding and too little on deposits. This model was only able to develop because of the perception of an implicit state guarantee for bank debt – a perception that reinforced the link between sovereign and bank risks that I described above.