euro area, banks have historically played an important role in financing the real economy. banks loans account for most of household borrowing and around 50 % of nonfinancial firms ’ external financing, which is very different from the us where around 75 % of firms ’ financing comes from capital markets ( equity and debt securities ). the importance of bank - based intermediation in the euro area explains the relatively large size of the euro area banking sector compared with the us – at 270 % and 72 % of gdp, respectively. overall, i expect the future of banking to involve some rebalancing away from such high levels of bank - based intermediation and towards more capital market - based intermediation. on the banking side, i anticipate that over time there will be a gradual decline in the size of the euro area banking sector. indeed, such a process of consolidation and resizing has already been on - going since 2008. in net terms the number of credit institutions has fallen by 9 % since 2008, or around 600 institutions, while the total assets of the euro area banking sector have declined by almost 12 %. the second largest reduction in the value of assets was recorded here in ireland. this process has seen euro area banks become significantly less leveraged, with the average loan - to - deposit ratio falling from 144 % in 2008 to 120 % in mid - 2013. i expect that this ratio will continue to fall and converge towards 100 % as banks seek to further consolidate their balance sheets and develop safer, more sustainable business models. and as a natural response to this, firms are likely to pursue new avenues for disintermediation. this brings me to development of capital markets. the crisis has already boosted disintermediation in the euro area, in particular for larger firms and those located in countries with more developed corporate bond markets, such as germany and france. our data shows that these firms have been able to offset reduced access to bank finance with bond issuance in the last 12 months. going forward, we can predict that the european capital markets will develop further. the first area will be the deepening of corporate bond and equity markets. this has obvious advantages in terms of diversifying the financing mix for euro area firms and allowing them bis central bankers ’ speeches access to a larger pool of non - bank investors. at the end of june 2013 insurers, occupational pension funds, money market funds and investment funds together had assets worth almost 16 trillion euros – that

are fully aligned with its european financial stability mandate. a second reason why banking union is essential to monetary union is that it supports the implementation of the single monetary policy. the even transmission of monetary policy across all member countries of the euro area requires a level of financial integration that dirk schoenmaker ( 2011 ) “ the financial trilemma ” in economic letters, 111, pp. 57 – 9. bis central bankers ’ speeches ensures well - functioning cross - border money markets. yet we have seen during the crisis that without a euro area - wide approach to financial governance, financial markets can end up re - nationalising. a strong banking union can help mitigate several sources of this fragmentation. a single supervisor should enhance transparency and thus increase trust in cross - border lending, while supervisory ring - fencing or national asset - liability matching would no longer be relevant given the ssm ’ s european focus. in addition, an effective single resolution mechanism would help attenuate the infamous bank - sovereign nexus. sovereigns would have less ability to intervene in failing banks, thus allowing bank risk to be better separated from sovereign risk. the third reason that justifies the banking union has to do with the effects of unsupervised cross - border lending on real economic developments. contrary to the “ it ’ s mostly fiscal ” view of the crisis, 2 financial sector developments largely explain the build - up of unsustainable current account and competitiveness positions in peripheral countries before the crisis. the current account deficits in most peripheral countries were in fact led by huge capital inflows implying capital account surpluses. the exposures of banks from core to peripheral countries more than quintupled between 1999 and 2008. competitiveness losses were simply the mechanism that connected the capital surplus and the current account deficit – that is, an appreciation of the real exchange rate caused by economic over - heating. as john williamson explained long ago it is impossible to have “ an immaculate transfer ” from capital inflows to current account deficits. 3 national supervisors found it impossible to contain these developments because they had to respect the single market rules and lacked the macro - prudential tools to offset the effects of large capital inflows. but by creating supervision at the level of market, banking union offers a possibility to better pre - empt such developments in the future – and therefore to better protect the real economy, growth and employment. the ssm and the practice of banking in europe let me now turn to the