There is no need for me to explain the dichotomy that arises when we have, on one hand, an industry that is becoming increasingly internationalised in nature and, on the other, a supervisory framework that remains predominantly based on national responsibilities and accountabilities. In a context where banking groups increasingly take decisions and manage risks on a global basis, inconsistencies or differences in the regulation and supervision across the countries in which they are active may create compliance costs and inefficiencies. Furthermore, adverse developments in one bank are more likely to have financial stability implications for several countries. These issues are certainly not exclusive to the EU. But the existence of the EU project adds an extra dimension, which brings challenges, responsibilities and also opportunities. Progress has been made in building the single market in financial services, but we are not there yet. In some segments of the financial markets, such as retail banking, there is a long way to go to achieve a fully integrated market. And recent experiences in relation to some cross-border acquisitions seem hardly compatible with the spirit of the single market. We face, therefore, several challenges: to safeguard the efficiency, effectiveness and consistency of supervisory action in more global and integrated financial markets; and to reduce the remaining obstacles to cross-border finance, both in terms of cross-border consolidation and in the provision of products and services. Some of these national differences have developed over a long period of time and go beyond the prudential or supervisory sphere.

As a result, country-specific factors have become less important in determining corporate bond prices and spreads. Cross-border holdings of long-term debt securities of monetary financial institutions grew from about 15% in 1999 to nearly 40% in 2007. Integration in the equity markets is less advanced but shows signs of improvement. Between 1997 and 2006, euro area investors doubled their holdings of equity issued in other euro area countries to 29% of their total portfolio of euro area equity assets. The retail banking segment has remained more fragmented. In particular, the euro area cross-country dispersion of bank interest rates, especially of interest rates on consumer loans, has remained relatively high. This reflects different conditions in national economies (e.g. credit and interest rate risk, size of firms, industrial structure and degree of capital market development), institutional factors (e.g. taxation, regulation, supervision and  2  BIS Review 20/2009  consumer protection) and financial structures (e.g. degree of bank/capital market financing and competitiveness). It was probably overoptimistic to expect a faster convergence in this segment. The creation of the euro also gave rise to expectations of a broad based convergence of underlying economic developments. These expectations were quite varied, in fact. Some people expected greater divergence as a consequence of specialisation. Others expected greater convergence. The result is mixed. Some convergence has been observed, in particular in terms of business cycle and dispersion across countries, which is comparable with that among the US states.