euro area, the more effective will be the transmission of ecb ’ s monetary policy decisions. one of the features of the financial crisis was the impairment of this transmission mechanism as financial markets within the euro area started to fragment along the national lines. the interest rates faced by businesses and households diverged significantly between member states not only because of differences in their operating environment, but because banks ’ own borrowing terms were tied together with those of their home - country sovereigns. in such circumstances, common monetary policy stance would also have different implications from country - to - country depending on the financial state of the sovereign. in the course of the crisis, reversing this financial fragmentation became an important policy question for euro area central bankers. in thinking about the benefits of the banking union, we should also take a moment to think about the alternative. in theory, we could either ( i ) retain the status quo and accept the destabilizing features inherent in the pre - crisis financial system or ( ii ) reverse the past gains in european financial integration and revert our banking sectors back within their national borders. from the perspective of a euro - area central banker, neither of these alternatives is desirable. as demonstrated by the crisis, the first option could cause devastating effects on the real economy with severe collateral damages. without the steps taken in the past two years toward the banking union, the european financial market could lose its credibility as a deeply integrated and seamlessly functioning market. as to the second option, i have already highlighted the interdependence between financial integration and common monetary policy. if the transmission of common monetary policy was restricted by national borders, its impact would be highly limited at best and destabilizing at worst. to a large extent, a nationally fragmented financial system could substantially set back other areas of european integration too, such as free movement of goods, services and labor. now, i ’ ve discussed why and how central banks benefit from the financial stability effects of the banking union. but the central banks themselves are, of course, integral part of the financial system and contribute to financial stability through their own actions. here it is worth noting that, with the ssm, the ecb assumes responsibility for both bank - specific and system - wide prudential supervision. this means more systematic bis central bankers ’ speeches oversight of ssm - member states ’ overall financial stability, which is backed up by the set of macroprudential tools in the new capital requirement regulation and directive ( cr

bank capital it has set aside to provision for losses on its assets, i. e., on its non - performing loans, made primarily to the industrial sector. 3 what does it mean to have little bank capital as provision for losses? i like the following analogy. a bank not keeping adequate capital buffer to absorb losses on its loans that are more or less 4 / 7 bis central bankers'speeches known to be arriving soon is akin to not preparing to rescue with emergency a person who has slipped off the terrace of a skyscraper, and instead in the midst of his almost surely fatal descent, hoping that the laws of gravity would somehow freeze and work differently this time. while such under - provisioning problem extends to some of the private banks too, the scale of the problem is three to four times magnified in case of public sector banks. by and large, this scenario meets the adverse conditions of the narrative i provided about banking and banking panics. but in our context, several questions immediately come to mind : why should i worry about whether i can bank upon my bank when my deposit is insured by the government? more so, if my deposits are with a state - owned bank? why should i bother about my bank ’ s asset quality? the double - edged sword of deposit insurance and state ownership of banks answering these questions is crucial to understanding how our banking sector problems are likely to play out. a moment of reflection reveals that as long as i trust the deposit insurance and the guarantee of the state behind the public sector banks, i have no good reason to run and pull my deposit out of an insured deposit or a state - owned bank. the catch is this. when banks are in poor health, it does affect the potential borrowers. once a bank ’ s asset quality is adequately impaired, the bank does not grow its lending book much with fresh loans. bank management of a thinly capitalized bank is interested in primarily making two kinds of loans. first, ever - greening of existing bad debt – throwing more money after the bad, so as to help the borrower repay past loan, not acknowledge its true quality, and simply kick the can down the road. second, risky loans that give banks high returns so that it can make a last - ditch effort to rebuild capital quickly – doubling up bets in a casino when first round of gambling has all gone sour. faced with such borrowing prospects, healthy borrowers who have access to alternate forms of finance may be able to switch