This thesis investigates the establishment of Banking Union (BU) in Europe. A thorough analysis of the evolution of the new regulatory framework is presented, while offering insights on the impact of BU on financial markets. A central theme is the tight interconnection among sovereign and banking risk and the impact of BU implementation on this sovereign-bank nexus. A particular focus is placed on Italian banking due to its dominant role in the EU-wide Non-Performing Loan (NPL) crisis. The adoption of multiple methodologies strengthens the findings: (i) event study methodology; (ii) Difference-in-Differences; and (iii) Difference and System Generalized Methods of Moments. The first empirical chapter provides evidence of different financial market reactions to the implementation of BU. Bank stock and Credit Default Swap (CDS) markets show divergent responses to the announcements associated with BU, with the CDS market reacting more strongly to the information content arising from BU news. Moreover, bank-specific features influence the market responses for bank sub-groups. The analysis conducted in the second empirical chapter suggests that market participants did not assess the implementation of the new EU bank resolution regime as being fully effective in weakening the sovereign-bank nexus in the short-term. Drawing evidence from the CDS market, a lack of immediate credibility in the Bank Resolution and Recovery Directive (BRRD) is revealed. The third empirical chapter provides an exhaustive analysis of the NPL burden in both the European and Italian contexts. In shedding light on the factors explaining the ex-post credit risk, the countercyclical nature of the NPL volumes is confirmed. Among bank-specific variables, profitability and credit growth are inversely associated with NPL volumes. The thesis identifies several strengths and shortcomings of the BU project, by framing them under different perspectives. In identifying several policy implications, insights are revealed on the necessity of future improvements to BU. Overall, the findings of this thesis make a significant contribution to academic literature and to the ongoing policy debate, while also being of interest to market participants.