For one, the persistence of national borders in a European financial market has in the past created compliance costs and reduced the synergies of banking integration. A European Commission survey in 2005 found that opaque supervisory approval procedures were a major deterrent to cross-border banking M&As.4 Moreover, national considerations may have reinforced the fragmentation of retail markets during the crisis. For example, some commentators have argued that supervisors erected de facto “internal capital controls”5 within the euro area, which restricted the flow of funds between banks and within cross-border banks. A similar pattern can be observed in how national authorities in the euro area have dealt with failing banks. In general, non-viable banks were merged with other national banks, rather than being wound down or broken up and sold off. Thus, what could have been an opportunity to increase foreign competition in domestic markets, and indeed to work through the crisis more quickly, in some cases ended up increasing national concentration. To give a comparison with the US, the FDIC has resolved around 500 banks since 2008, mainly by selling parts of banks to other banks, whereas the equivalent figure for the euro area is around 50.6 All this suggests that the move towards a genuine Banking Union in the euro area could help create the conditions for deeper retail banking integration. A Single Supervisory Mechanism (SSM) should lead to harmonisation of rules and standards, and also remove distortions created by national borders.
First, our forecast presupposes that it will be possible to manage the debt crisis in Europe so that the acute problems can be resolved. There is a risk that the problems will continue and that the debt crisis in Europe will get worse, which may lead to weaker economic activity in Sweden and abroad. If this proves to be the case, monetary policy in Sweden will have to be more expansionary to mitigate the effects of the more severe crisis. Conversely, it is possible that political agreements will be reached fairly soon and that the financial unease will subside more quickly than we expected. This could lead to stronger economic activity in Sweden and abroad than expected, and it will then not be necessary for the repo rate to be so low. Secondly, the outcomes for inflation abroad have been surprisingly high recently, despite falling commodity prices and weaker economic activity. There is therefore a risk that the situation abroad will be characterised by economic stagnation and high inflation, so-called stagflation. Central banks abroad may then be faced with a very difficult balancing act. The risk of further weakening economic activity will reduce the scope for raising policy rates to  6  BIS central bankers’ speeches  combat inflation, which may result in inflation continuing to be high. All in all, there is therefore a risk that inflation abroad may not fall to the extent we expect. This will lead to higher inflation in Sweden too through higher import prices.