The financial crisis and the ensuing sovereign debt crisis have revealed weaknesses in the European financial architecture. Although capital market integration in Europe intensified prior to the crisis, it took place mostly via debt capital markets. This form of financial integration turned out to be vulnerable at the outbreak of the financial crisis. Many European countries experienced a reversal of capital flows and a “sudden stop” as investors moved their funds into safe havens. Fragmentation of European capital markets increased, and a mutually reinforcing feedback loop between risks of banks and sovereigns (the “sovereign-bank nexus”) emerged.[...]