. under the current setup, when bank solvency is put into question, the looming restructuring implies a heavy financial burden for the sovereign, which increases doubt over the creditworthiness of this particular state. according to eurostat data, public interventions in support of financial institutions, such as direct recapitalizations, overall fiscal support measures and the nationalization of banks, are reflected in a cumulative 5 % - of - gdp increase in the national debt of euro area countries until 2013. however, this link between weak sovereigns and weak banks works both ways. as sovereign bonds account for a large share of bank assets, doubts about sovereign creditworthiness directly translate to a reevaluation of banks ’ assets, and consequently to doubts about the solvency of these banks. in the future, the srm will ensure that the costs of bank failure are borne first and foremost by the private sector, with sovereigns providing funds only in exceptional circumstances. the srm structure is explicitly based on the principle that any losses are to be borne by shareholders and creditors and that any public assistance should only be transitory and be recouped by means of ex post levies on the banking sector. by improving private risksharing, the banking union will importantly sever the link between financial system instability and resulting threats to fiscal sustainability of individual euro area countries, especially smaller ones. the high risk premiums some banks faced in refinancing markets meant that they did not benefit from the low interest - rate environment provided for by the accommodative monetary policy stance of the ecb. consequently, they were not in a position to pass on these favorable interest rates to their customers. therefore, in some countries, the low interest rates and unconventional measures did not feed through to the customer level. decoupling the correlation between the cost of funding of euro area banks and that of their respective sovereigns will remove an impediment to the proper functioning of monetary policy transmission and will ease the fragmentation of banking markets. in a number of euro area countries under stress, not only had interest rates for loans remained elevated, but also volumes of bank loans had contracted during the crisis. when this contraction had been due to tighter credit standards as a result of banks ’ impaired access to market funding, breaking this link should benefit the private sector, and especially the corporate sector, in these countries. in austria, loan developments had been less worrisome, and the corporate sector has not so far suffered from credit constraints

sector might cause important and risky business activities to be shifted into less regulated areas such as shadow banking entities. competitive distortions could also arise from a failure to establish a genuine single rule book and from the discretion that national authorities maintain regarding, for example, the implementation of macroprudential tools. notable national differences in supervision might therefore remain in place ; in other words, the playing field would then not be completely level. on the other hand, it may be argued that there should be scope for some degree of differentiation below the euro area level. after all, different cultures and languages will continue to exist within the euro area. in the same vein, the question remains if the new supervisory system is apt to address national problems properly. for instance, there will still be national or local financial cycles, as has been the case for business cycles to this day. as small banks will remain within the remit of national supervisory authorities, there will in any case be the need for a two - tier supervisory regime. banking union will not only affect relationships among the various players within the euro area, but also relationships with players outside the euro area. the fact that banking union currently only covers the euro area may give rise to competitive concerns. to be sure, all eu countries can be expected to benefit indirectly from banking union via a more stable financial system in the participating countries. but let me stress here that it would be in the interest of all if as many countries as possible decided to join. banks domiciled in countries that opt to join will enjoy the reputational gains from being subject to the same supervisory standards as their euro area peers, which might for instance dampen risk premiums on their debt. obviously, this might encourage a number of central, eastern and southeastern european countries which are not ( yet ) part of the euro area to join banking union. to conclude, centralizing banking policy at the european level undoubtedly constitutes a milestone in deepening and completing the euro area ’ s economic and institutional integration. at the same time, banking union is of course no panacea, and in itself does not bis central bankers ’ speeches solve the problems surrounding banks. furthermore, the problems of the banking sector were by no means the only reason behind weak growth, rising government debt or fragmentation in the euro area. banking union can therefore only be one – albeit an important – element in the overall set of measures which are instrumental in putting the future development of the euro area on a more sound economic and institutional footing.