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Eurozone banks face fragmentation danger, ECB cautions

ECB Vice President Luis de Guindos warned that the eurozone's banking sector is at a great risk of fragmentation due to lenders turning away from cross-border consolidation and refocusing their activities on domestic markets, Reuters reported.

De Guindos, who was speaking at a conference in Brussels, said EU lenders have "substantially reduced" their cross-border interest since the 2008 financial crisis, with roughly 60% of their total exposures being in their home countries. De Guindos noted such concerns may also put the completion of the bloc's banking union in jeopardy.

However, de Guindos added that a potential solution could include the establishment of a European safe asset, which has already been proposed by the EU's risk regulator.

A potential safe asset could become the benchmark for investors in EU capital markets, reduce incentives for capital flight on national bonds within the eurozone, and contribute toward reducing risks on banks' balance sheets, according to de Guindos. However, the proposal has not been discussed substantially due to opposition from Germany, Reuters noted.