The balkanization of European banking
The sudden urgency among policymakers to proceed with European banking union stems from a dawning realization of the extent to which national regulators have promoted an opposite response to bank deleveraging: trapping bank capital and liquidity inside their borders to conserve local credit availability.
This balkanization will render ECB monetary policy irrelevant and make the credit crunch even worse in the periphery and recession more likely to spill over into the core.
Risk was very much on last month, with spreads on peripheral eurozone sovereign bonds narrowing and European bank issuers returning to the primary debt capital markets as yield-hungry, cash-rich investors chased returns. Optimism among investors that European policymakers were getting a firmer grip on the eurozone crisis even appeared to survive the inconclusive eurozone summit of October 18-19.