Clearly, it was not by chance that some countries found themselves in a more difficult situation than others. It was mainly those countries that had implemented inappropriate economic policies in the past. This is also why the first responsibility in this situation is for countries to make determined reforms and convince markets that they are credible. But many were already doing this, only for interest rates to rise even higher. There was an element of fear in markets’ assessments that governments, acting alone, could not remove. Markets were not prepared to wait for the positive effects of reforms to emerge. In our view, to restore the proper transmission of monetary policy, those unfounded fears about the future of the euro area had to be removed. And the only way to do so was to establish a fully credible backstop against disaster scenarios. 2  BIS central bankers’ speeches  We designed the OMTs exactly to fulfil this role and restore monetary policy transmission in two key ways. First, it provides for ex ante unlimited interventions in government bond markets, focusing on bonds with a remaining maturity of up to three years. A lot of comments have been made about this commitment. But we have to understand how markets work. Interventions are designed to send a clear signal to investors that their fears about the euro area are baseless. Second, as a pre-requisite for OMTs, countries must have negotiated with the other euro area governments a European Stability Mechanism (ESM) programme with strict and effective conditionality.
Again, the biggest strides have been taken in the realm of supervision, but a greatly improved resolution framework is also in the process of being introduced. A common deposit insurance system is not yet on the agenda, however. That might be an impediment to further banking integration and potentially a source of vulnerability. EU members outside the euro area can opt into banking union. This introduces the possibility of deep banking integration without a LOLR, which is a risky combination, as we have seen. That risk could of course be mitigated through uncapped central bank swaps and mutual acceptance of collateral, but as far as I can see, there is as yet no formal framework for this. In this connection, I note with interest the plans in this region to progress with regional banking integration by, for instance, the ASEAN. The benefits will be substantial, but we need to be mindful of the risks and learn from the European experience. As I see it, banking integration without a monetary union or alternative arrangements for FX liquidity provision is potentially very risky. That said, recent events have shown that a monetary union without a banking union is also risky. At the global level, there has been some progress on the framework for supervision, crossborder crisis management, and resolution of cross-border banks through the work of the Financial Stability Board (FSB).