the single financial market. vulnerable euro area member states are facing major challenges in relation to both public finances and the financial sector. a banking union does not necessarily address these challenges. the reforms required in these member states will undoubtedly be costly and have real economic implications. it is imperative to find a solution to existing challenges in vulnerable states and banks so as to bring them back on the right track without undue delay. danmarks nationalbank supports the overall vision for a banking union. a banking union makes good sense in an integrated financial market, where financial institutions are free to operate across national borders. the single market for financial services has contributed to strengthening competition and the supply of credit, to the benefit of both the danish financial sector and its customers. integration within the european financial sector increased until 2007, but has since the onset of the financial crisis been decreasing. like the other eu member states, denmark has an interest in a well - functioning single financial market. i see merit in the current discussions on the establishment of a banking union as a mechanism for supporting financial integration in the eu. developing the individual elements of a banking union will be a huge task. if the vision is to be realised, the banking union must comprise at least three elements : ( 1 ) a single supervisory mechanism, ( 2 ) a single resolution mechanism for failing banks, and ( 3 ) a single deposit guarantee scheme. bis central bankers ’ speeches initially, focus has been on establishing a single supervisory mechanism under the auspices of the european central bank in order to solve some of the problems currently faced by some european banks. the single supervisory mechanism is primarily aimed at euro area banks, but non - euro area member states may opt in. the framework conditions will differ, depending on whether the member state in question has adopted the euro. at present it looks as if non - euro area member states will be able to participate in the single supervisory mechanism on an equal footing with euro area member states. this is positive. the set - up with a single supervisory mechanism can enhance the credibility of financial supervision in the eu, especially in the euro area, and will contribute to financial stability, which will also be an advantage for the danish economy – whether or not we decide to join. the commission is expected to table proposals for the remaining elements of the banking union later this year. the content is as yet unknown, and it is difficult to predict the final set - up. the distribution of costs is a politically sensitive issue, not least in terms of whether legacy

potential consequences on the financial system and the economy. ii. the emergence and persistence of asset price bubbles and financial imbalances so what key factors and processes contribute to the emergence of asset price bubbles and their persistence over a fairly long period before they abruptly unwind? there is no consensus among economists about the answer to this question. and, indeed, some have argued that they are meaningless because in their view asset price bubbles do not really exist! some economists had claimed that even the most famous bubbles in history – e. g. the dutch tulip mania from 1634 to 1637, the french mississippi bubble in 1719 - 20, the south sea bubble in the united kingdom in 1720 and, more recently, – the worldwide new economy boom in the late 1990s ( the “ dot. com - bubble ” ) – should not be considered as such because they can be explained by rational expectations justified by fundamental factors related to future returns on the respective underlying assets. which in one case were tulip bulbs! 1 this view may have some merits given the hypotheses on which it rests. but, there is little doubt in my mind that we occasionally observe behavioural patterns in financial markets, which although they may be perfectly “ rational ” or justified from an individual investor ’ s perspective, they nevertheless lead to large, increasing and unjustifiable deviations of asset prices from their fundamental values. indeed, an insight into special or psychological factors that can affect stock market valuation can be highlighted by the following simple story : once an investor approached his stockbroker for advice on which stock to buy and was told to purchase a penny stock that was valued at just 50 cents a share. “ this one is really going to move ”, the broker said, and the persuaded investor instructed his broker to buy him 5000 shares. the following day, the stock was valued at 1 euro and, seeing this, the investor called the broker and told him to buy another 10, 000 shares. the next day the investor saw that the price of the stock had jumped up to 3 euro. excited and satisfied with the huge profit he had made in just two days, the investor called his broker : “ sell all my shares ”, he instructed. “ to whom? ” the broker replied. “ you were the only one buying that stock! ” this humorous story is instructive because it highlights two features of asset markets that seem to contribute to the emergence of bubble - like phenomena and the build - up of financial imbalance