And the new EU resolution framework has shifted the cost of bank failures away from sovereigns and onto the financial sector, which creates another channel of private risk-sharing. Without entering into the discussion on which further regulations may be necessary for the shadow banking sector, we have to acknowledge that the banking union and the capital markets union are not yet complete. We lack a truly level playing field for cross-border banks and investors, and this stands in the way of deep financial integration. A single financial market should have one set of rules and all market participants should be able to operate freely within it. Yet that is not the case at present. For capital markets, there are differing rules and market practices for financial products across countries, and insolvency and judicial systems vary widely. This matters because a consistent and efficient framework for pursuing failed contracts is vital to reduce uncertainty for cross-border investors. ECB analysis finds that where insolvency and judicial frameworks are more efficient, risk-sharing through both capital and credit markets is higher.21 For banks, the Single Market is still fragmented along national lines. First, discrepancies in the regulatory framework reduce the economies of scale for banks operating across borders.22 Second, an incomplete framework for bank resolution also deters cross-border integration. When resolution is not fully credible, it can create incentives for national authorities to limit capital and liquidity flows so as to advantage their depositors in the event of a bank failing.

All in all, a consistent framework of regulations, laws, judicial enforcement and resolution is essential for deep and resilient financial integration. Completing the banking union and the capital markets union is therefore a necessary condition for the expansion of private risk-sharing in the euro area. Yet it is not a sufficient condition. And this brings me to the second area where public sector policies can complement private risk-sharing: by increasing economic convergence and thereby building trust among cross-border investors. 4. Increasing economic convergence The crisis showed clearly the potential of some euro area economies to become trapped in bad equilibria. And plainly, as long as this risk exists, it will act as a deterrent to cross-border integration, especially for retail banks that cannot “cut and run” as soon as a recession hits.28 Put simply, we will not be able to foster private risk-sharing in our union if crises can call its very integrity into question. So, if we are to deepen private risk-sharing, the tail risk of bad equilibria needs to be removed, and replaced by policies that lead to sustainable convergence. This requires action at both the national and euro area levels. In the eyes of many observers, three features made countries vulnerable to downward spirals: weak banks, lack of fiscal space and low growth. Stabilising the financial sector in the ways I have just described would address one part of the problem. But the common factor uniting all three was growth. Very low growth rates reduced fiscal space and harmed bank balance sheets.