87, 147 – 161. fecht, f., gruner, h., and p. hartmann, 2007. “ welfare effects of financial integration. ” cepr discussion paper 6331. financial integration in europe, european central bank, april 2008. fecht, f., h. gruener and p. hartmann, 2012. “ financial integration, specialization and systemic risk ”, journal of international economics, vol. 88. bis central bankers ’ speeches the second consequence was on the liability side of banks ’ balance sheets. as banks ’ funding from abroad came mainly through the interbank market, the composition of their foreign liabilities was short - term and debt - based. this meant that funding could quickly dry up at the first sign of distress. 12 with a more integrated banking sector, however, this effect would have been less dramatic. as foreign banks would have equity stakes, they would have an incentive to maintain cross - border funding within the group. this is what happened, for example, in the baltic countries where foreign ownership of the banking sector was high. 13 these two consequences combined to create a third effect. as banks ’ assets were not well allocated, nor well diversified geographically, they were more vulnerable to domestic shocks. and as their foreign liabilities were mainly interbank, i. e. not equity - based and short - term, they could not share the subsequent losses with other jurisdictions. this meant that when the crisis hit, the cost of repairing their balance sheets fell largely on their domestic fiscal authorities. the result was the infamous bank - sovereign nexus that has perpetuated financial fragmentation in the euro area. 14 my conclusion from this experience is as follows : the quality and comprehensiveness of integration matters. there are costs which can arise from a type of financial integration that is short - term and reversible ; or from having perfect integration in one market and fragmentation in another. a key question for the euro area is therefore : how can we generate a higher quality of financial integration for the future? making financial integration sustainable : the role of a banking union the pre - crisis experience suggests three changes are needed. first, stronger ex ante supervision to mitigate the possible destabilising effects of financial integration. second, an improved policy framework to maximise the stability benefits, namely by encouraging deeper cross - border banking integration. third, better ex post risk - sharing arrangements, such as resolution frameworks, so as to prevent shocks from spilling over to

this way supervisors and central banks could approximate the potential systemic impact of the scenario selected. banks would benefit as well from such an exercise through benchmarking and learning effects. cooperation between central banks and supervisors let me then turn to the last topic i would like to touch upon, namely the cooperation between central banks and supervisors. i will consider three areas where i see major scope for improvement, namely financial stability assessments, liquidity and crisis management. the periodic monitoring and assessment of financial stability conducted by central banks would benefit from an enhanced cooperation between central banks and supervisors. in that context, i recall that the fsf stressed in its april report the need to improve the interaction between central banks and supervisors in the early detection of risks to the financial system. this entails that the supervision of individual institutions should be enhanced with central banks ’ financial stability assessments, which in turn should benefit more from supervisory insights. i am fully supportive of this recommendation. in their financial stability assessments, central banks take a “ top down ” approach by focussing on the main macro - prudential risks. supervisors, by contrast, take typically a « bottom up » approach by looking at the risks of individual institutions. somewhere these two approaches have to meet and influence each other for the better. for central banks this may mean that they have to communicate their financial stability assessment in a way that is directly relevant for supervisors, while supervisors have to bring to the attention of central banks developments in individual institutions that are important for the financial system as a whole. this recommendation is clearly relevant not only at the national level but also at a crossborder level. concerning the eu in particular, this presupposes an effective interaction between the assessment of risks faced by the eu banking sector made by central banks and supervisors, as reflected in the analyses of the bsc and cebs respectively. an important aspect of the cooperation between central banks and supervisors in periodically assessing the financial stability conditions is central banks ’ access to supervisory information. in normal times, the assessment of risks for the financial system as a whole needs to rely on a large set of information sources, including those from banking supervisors. an immediate example is represented by the data on the solvency and profitability of the banking sector, as well as ad hoc information on specific exposures of the banking sector. while it is fair to say that there exists already extensive access by central banks to supervisory information there is certainly room for improvement in terms of timeliness, frequency and detail. take the example again