Economic and Monetary Union (EMU) architecture – unity in monetary policy, but national plurality in financial policies – was built on the conviction that: 1.  the EMU economies would grow closer together economically and financially;  2.  financial market pressure would have a disciplinary effect on the Member States’ national budgetary and economic policies;  3.  national political measures would be fully sufficient to counter any economic or financial imbalances. Today, after five years of the biggest post-war crisis in Europe, we know that these assumptions were not in line with reality. One of the consequences was a banking sector that was no longer able to provide sufficient credit to households and enterprises in the euro area during the crisis. The pre-crisis national safeguards in the EU have proven incompatible with the single currency and monetary policy. The planned European Single Supervisory Mechanism (SSM) in combination with a Single Resolution Mechanism (SRM), will make a key contribution towards restoring financial stability in the euro area. Nonetheless, the primary mandate of the ECB is, and will remain, to maintain price stability in the euro area. This objective will not change with the ECB’s new responsibility for banking supervision in Europe. However, bearing in mind the role of financial markets for the transmission of monetary policy and the importance of well-integrated financial markets in a monetary union, measures to ensure a stable and well-ordered financial system in the euro area will be beneficial for the conduct and smooth transmission of monetary policy.

With the banking sector in the euro area being an essential source of financing of the real economy, the integration of these markets plays an important role in the pass-through of monetary policy decisions to the lending rates of the banking sector. The financial crisis has challenged the stability and integration of European financial markets in an unprecedented way. It has thrown into reverse the steady integration seen since the inception of the euro. The causes for this were manifold. First, heterogeneous economic developments caused by financial and structural imbalances across euro area Member States led to outflows of funds from the countries that were perceived as more risky – in view of their large cumulated imbalances stemming from ample competitiveness gaps, high current account deficits and high private sector leverage – and led to inflows into countries with a safe-haven status. Second, imbalances in the banking sector arose from undue risk-taking, investment in opaque financial products and excessive leverage. This has caused some financial institutions to be cut off from wholesale funding markets and interbank funding. The seclusion of some financial institutions was also the result of the measures introduced by some Member States to ring-fence the domestic banking industry from foreign contagion. While this was an understandable response from regulators that had a domestic perspective in their institutional mandates, the consequence was a further fragmentation of financial markets. Third, in some countries, fiscal fragilities interacted with banking fragilities.