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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.