Since the crisis, cross-border banking lending has halved, and the ability of the European system to recycle the surplus savings of peripheral nations to other parts of the private sector has been severely curtailed. The good news is that European authorities recognise the need to re-found the euro area financial union on the principle of risk sharing. The current fragmentation of the system stems in part from a collapse of confidence in financial institutions across national borders. The recent Asset Quality Review and stress tests conducted by the ECB represent a major step towards restoring that confidence. Close to € of capital has been raised since January 2014 as a result. 21 The establishment of a Banking Union and Single Resolution Mechanism as well as implementation of the G20 proposal on Total Loss Absorbing Capacity (TLAC) will help break the link between sovereigns and banks and establish greater risk sharing between creditors and debtors. When combined with improved resiliency of banks, more sustainable crossborder banking flows should grow with time. It is also welcome that the new Commission has advocated the creation of a Capital Markets Union to boost cross-border flows of market-based finance. Such a union would deepen the single market, could benefit all member states, and could promote much greater crossborder risk sharing within the euro area. Had the cross-border financing of deficit countries taken the form of equity rather than debt, firms in deficit countries would have been more robust and losses would have been dispersed.
2  BIS central bankers’ speeches