Most had a financial sector characterised by poor risk management, low capital and liquidity, inadequate corporate governance, and weak supervision and regulation – diluted by many years of excessive optimism in the self-repairing power of markets. When the Lehman shock hit, banks exposed to toxic US assets ran into difficulties and some were bailed out by their governments. In the euro area, these banks were mostly located in Germany, France and the Netherlands. Bank bailouts took place on a staggering scale. In 2009, they totalled around 8% of GDP in Germany, 5% in France and 12% in the Netherlands. 1 These bailouts did not greatly affect sovereign borrowing costs, however, thanks largely to the relatively strong fiscal positions of the governments implementing them. In the second phase, the crisis spread to banks in Spain and Ireland that had similar weaknesses, but were instead overexposed to the collapsing domestic real estate market. Another wave of bank bailouts followed, and some signs of tensions in sovereign debt markets began to appear. Those tensions were compounded by the third phase, which began when the Greek crisis shattered the impression that public debt was risk-free, triggering a rapid repricing of sovereign risk. To those who saw the crisis as a consequence of moral hazard, this represented a required return of market discipline vis-à-vis sovereigns – a view that was reflected in the Deauville agreement in October 2010. 1/9  BIS central bankers' speeches  These events spread contagion to all sovereigns now perceived as vulnerable by financial markets.
So our duty, as policymakers, is to return their trust and to address the areas of our union that we all know are incomplete. 1 Figures include recapitalisation measures, guarantees, asset relief interventions, and liquidity measures other  than guarantees. See Financial Crisis Aid amounts for a more detailed breakdown. 2 This calculation assumes all exposures had been subject to fair valuation, and applies to bonds of Cyprus,  Greece, Ireland, Italy, Portugal, Slovenia and Spain. 3 Based on end-2010 Core Tier 1 capital. 4 A significant share of government bonds were held by banks at amortised cost. 5 In fact, internal ECB analysis finds that the relationship between sovereign and corporate CDSs in this period  was as strong as that between sovereign and bank CDSs. And banks that had larger sovereign exposures had a similar correlation with sovereign CDSs as banks with smaller exposures. 6 See Mundell, R. (1961), “A Theory of Optimum Currency Areas”, American Economic Review, 51 (4), pp. 657– 7/9  BIS central bankers' speeches  665; McKinnon, R. (1963), “Optimum Currency Areas,” American Economic Review, 53, pp. 717–724; Kenen, P. (1969), “The Theory of Optimum Currency Areas: An Eclectic View,” in Mundell, R.A. and Swoboda, A.K. (eds), Monetary Problems of the International Economy, Chicago University Press. 7 European Commission estimates. See Nikolov, P. (2016), “Cross-border risk sharing after asymmetric shocks:  evidence from the euro area and the United States”, Quarterly Report on the Euro Area, Vol. 15, No 2.