Otherwise, such differences might become a source of financial fragmentation in their own right. Neither of these criteria is easy to fulfil. As the experience with Lehman Brothers has demonstrated, failures of large, integrated financial institutions can have devastating consequences for economic stability. Risks of contagion from one institution to entire financial sectors greatly complicate any effort to establish a more symmetric risk and rewardstructure for banks. Harmonising financial sector policies across countries in turn requires substantial operational and legislative efforts, given that national institutions have evolved separately and are now heterogeneous in many regards. All these difficulties can be addressed and, in fact, they are being addressed by European policy-makers. In particular, the recent initiatives at European level comprise several crucial steps to achieving a more incentive-compatible as well as a more integrated and coherent framework among countries. Let me elaborate on several concrete elements. The first step is the establishment of a Single Supervisory Mechanism (SSM). The SSM aims to ensure that all supervisory decisions about euro area banks are taken in a consistent and stringent manner, independently of the country in which it is located. Once fully effective, this will reassure markets that all banks face the same scrutiny and thus will counteract financial market fragmentation in the euro area. Moreover, by delegating supervisory decisions from the country to the euro area level it facilitates the internalisation of cross-country spill-overs, thus allowing for more efficient outcomes.
By the end of 2008, the problems of banking sectors – in the US, Europe and elsewhere – and the need for massive deleveraging had become apparent. At the same time, the interbank market was severely disrupted, and so was the transmission of monetary policy impulses to the real economy. The measures adopted by the Eurosystem were geared at restoring the functioning of its transmission mechanism, and at supporting the continued availability of credit to households and non-financial firms. As a result of increasing tensions in the sovereign debt markets since 2010, the situation of the euro area financial sector worsened. Doubts about the sustainability of sovereign debt levels in some countries of the euro area led to significantly increased levels of sovereign bond spreads. This, in turn, also led to higher interest rates in the private debt markets of the affected countries. It became apparent that the health of the national banking sector was often closely intertwined with the health of the local sovereign: funding problems in the banking sector and weak fiscal positions mutually reinforced each other. Significant heterogeneity emerges when looking at changes in the bank balance sheet items in different countries of the euro area, primarily concerning changes in deposits and in credit growth.