us. a recent study shows, for the us, that local supervisors tend to be more lenient with banks than federal supervisors are : they downgrade less frequently. 7 the authors justify this behaviour, among other factors, by regulatory capture. and indeed, there is no reason to believe that these findings would be any different for other industrialized countries, including the euro area. therefore, following this argumentation, placing supervision at the european level would help to alleviate national bias and possible regulatory capture. 3. the ecb ’ s involvement in a banking union there are good reasons developed in the academic literature for allocating the task of banking supervision either to the central bank or to a separate supervisory authority. some of these arguments have already been put forward in a 2001 paper of the ecb, which concluded that national central banks should have a fundamental role in prudential supervision in the euro area. 8 let me turn first to the benefits of allocating supervisory powers to the central bank. • a first argument why the combination of both supervision and monetary policy under one roof is beneficial results from the fact that being responsible for monetary policy creates for the central bank an intrinsic and deep interest in a stable financial system. such stability can be jeopardized through the failure or break - up of an individual financial institution. if a banking failure occurs, the financial system might be destabilized through contagion which could arise through several possible channels : one such channel could be through bilateral exposures to the failing institutions. other channels could be related to informational contagion such as uncertainty about such bilateral exposures, or uncertainty about the nature of the shock that hit the institution. moreover, those direct channels might be amplified if resolution mechanisms are complex, lengthy or surrounded by too much uncertainty. a central bank has an interest in avoiding the risk of such a destabilizing situation because of its mandate for price stability : since the transmission of its monetary policy relies in the first instance on the smooth functioning of the money markets. money markets are, however, one of the first markets to be affected if there are doubts about the solvency of an institution. this was clearly witnessed in august 2007, when the emergence of first doubts about the exposure of individual european banks to the us sub - prime mortgage market led to a temporary standstill of that market. 9 agrawal, s., d. lucca, a. seru and f. trebbi : “ inconsistent regulators : evidence from banking

and capital mobility ”, review of economics and statistics 87, 423 – 438. schoenmaker, d. ( 2011 ) : “ the financial trilemma ”, in economics letters, 111 pages 57 – 59 ; freixas, xavier ( 2003 ) crisis management in europe. in : kremers, j., schoenmaker, d., wiert, p. ( eds ) 2009, “ financial supervision in europe ” edward elgar p. 141 – 165. bis central bankers ’ speeches objectives are : first, financial stability ; second, financial integration ; and third, maintaining national financial policies. [ slide 1 : the financial trilemma ] according to the financial trilemma, it is not possible to achieve all three objectives at the same time. the reasoning behind is that with increasing financial integration, pursuing national financial policies will generally not lead to financial stability, because national policies seek to benefit national welfare, while not taking into account externalities of their supervisory practices on other countries. 4 this leads to an under - provision of financial stability as a public good. 5 a lesson of the trilemma is that it is beneficial for the provision of financial stability to replace national policies with policies at the supranational level, thus geographically aligning supervisory incentives with the effect such supervision has on the financial sector as a whole. second, the events of the past few years have demonstrated that monetary union in europe requires a high degree of financial integration, in which financial institutions diversify their assets and liabilities across euro area countries. this is essential for an effective transmission of monetary policy. until the start of the financial crisis and in particular until the beginning of the sovereign debt crisis, there was good progress in all aspects of financial integration. unfortunately since then we have been facing a continuous development in the opposite direction with fragmentation of markets along national borders. even more than that, we observe a reversal of flows with capital going to core countries and away from the periphery. one example of very quick initial integration was the euro area money market which nevertheless has shown recently a much higher dispersion of rates, reduced cross border volumes with a virtual stop to peripheral countries. chart 2 illustrates how quickly and profoundly interest rates in the short - term money market converged after 1999 and how the dispersion exploded following the crisis. [ slide 2 : convergence and fragmentation of money market rates ] money markets trade an extremely homogeneous good – central bank money –, and the