Now, either because they really believed that the untested ECB had magically removed all risk from the system or saw the possibilities of a moral hazard trade, or both, major European banks took on as much periphery sovereign debt (and other periphery assets) as they could. Indeed, as we shall see below, these banks were incentivized by the European Commission to get their hands on as many periphery bonds as they could and use them as collateral in repo transactions, thereby upping the demand for them still further. There was, however, one slight flaw in the plan. While bank lending and borrowing may be cross-border in the Eurozone, bank resolution and bailout responsibilities (notwithstanding the 2012 proposal for an EU banking union, which does little to fundamentally address these problems) are still national. So, while any individual bank could play this moral hazard trade, if they all did it, all at once, then what was individually too big to fail became very quickly too big to bail as a whole. Once again, the dynamics of the system were different from those of the sum of the parts.

Mark Blyth, Austerity, loc. 227