Financial cohesion, in turn, ensures that the monetary policy signals are properly and evenly transmitted to all jurisdictions of the monetary union, without, however, levelling out the premiums for different credit and liquidity risks. In fact, during the crisis, the divergence of bank funding conditions at national level has led to cross-country differences in both the costs of financing and the availability of loans. The retrenchment of credit supply within national borders, coupled with funding pressures, has impaired the transmission of monetary policy. The need to counter these adverse developments has been a key rationale behind the extraordinary monetary policy actions undertaken by the ECB in the wake of the crisis, such as the full allotment, the longer-term refinancing operations (LTROs) or the relaxation of the collateral framework. At the same time, the emergency liquidity assistance (ELA) provided by the national central banks was used more intensively. Although this is carried out by the national central banks at their own risk and for their own account, it might lead to tensions between the national and European levels of monetary policy, which would not be sustainable. A renationalisation of the monetary architecture would not be effective. Our non-standard measures can and should only provide temporary support for two reasons. First, keeping our non-standard measures in place for too long can adversely affect agents’ incentives in the economy at large and lead to moral hazard.
In this regard, the banking union with effective supervision and bank resolution can foster the necessary restructuring in the euro area banking sector, can further spur balance sheet repair and can restore the banking sector’s intermediation function. In particular, a European resolution mechanism with adequate powers and tools will be needed for effective resolution without involving taxpayers’ money. At the same time, this framework will ensure the revitalisation of the banking sector and revive financial integration. The early repayment by banks of the liquidity received from the first three-year LTROs has given initial mild indications for improvements in banks’ funding conditions and the overall health of the banking sector. But complacency is not warranted. Balance sheet repair in the euro area banking sector has to continue to fully restore wholesale and interbank funding markets, which will allow banks to return to their normal sources of funding, releasing them from the strong dependence on central bank intermediation, particularly in the case of banks receiving ELA. Conclusion Let me conclude. The sovereign debt crisis has thrown into reverse the steady financial market integration seen since the inception of the euro. This trend was largely driven by the link between banking and sovereign risks. 6  BIS central bankers’ speeches  The crisis has hampered financing conditions. By consequence, the monetary policy transmission channel has been clogged and ECB has been compelled to apply unconventional measures to repair the distorted flow of credit in the euro area.