For example, the average cost of borrowing for non-financial firms in Portugal is more than 5% per year, whereas the equivalent for French firms is around 2% per year. One would imagine in this situation that a Portuguese firm would seek out a French bank, but the euro area banking market does not facilitate such arbitrage. Direct cross-border loans to firms account for just 7.5% of total loans to firms. And local affiliates of foreign banks represent on average only around 20% of national markets, and much less in larger countries. Thus, firms depend heavily on the health of their domestic banks. Moreover, while corporate bond issuance has partially substituted for bank lending, it is strongly concentrated in non-distressed countries where there has been no decrease in the net flow of bank loans. The net issuance of debt securities, quoted shares and bank loans in non-distressed countries was plus € billion in 2013, whereas it was minus € billion in distressed countries. Of course, in principle firms from distressed countries can issue securities in non-distressed countries. In practice, however, it is legally complicated due to issues of different governing law, especially when securities are traded along a chain of financial intermediaries. This analysis points to two missing pieces in the euro area financial market: lack of retail banking integration and lack of capital market integration. The low level of retail banking integration reflects several factors, but diverging approaches to supervision and resolution are certainly among them.

Svein Gjedrem: Is the financial system stable? Speech by Mr Svein Gjedrem, Governor of Norges Bank, at the 2001 Annual Meeting of the Norwegian Savings Banks Association, Haugesund, 18 October 2001. Please note that the text may differ slightly from the actual presentation  *  *  *  Introduction The role of the financial industry in the economy has become increasingly important over the last decades. Deregulation and technological advances have increased the industry’s opportunities and scope to channel savings to various projects. Strong competition has induced the industry to make use of these new opportunities. The range of saving and financial instruments is becoming ever wider. Systems and financial instruments for managing and controlling risk are becoming more advanced. As a result, it has become easier for households and enterprises to decouple consumption and investment from current income. In the second half of the 1990s, in particular, international capital 1 markets have become more integrated. It has been easier for growing economies to finance investments through a balance-of-payment deficit and foreign capital. At the same time, countries with high savings can increasingly diversify their investments. Globalisation places increasing demands on the business sector’s ability to adapt. New products and technology squeeze out old solutions. This creative destruction, as Schumpeter called it, may foster a more efficient distribution of resources and higher economic growth in the long run. A rapidly changing environment places considerable demands on the financial industry. The financial prospects for a project must be assessed in relation to risk.