and garricano ( 2009 ), the spanish cajas whose chief executives were appointed on the basis of political standing, rather than banking experience, extended more loans to real estate developers and fared substantially worse both before and during the crisis. see cunat, v. and and garicano, l. ( 2009 ), “ did good cajas extend bad loans? the role of governance and human capital in cajas ’ portfolio decisions ”, october. giannetti, m., and ongena, s. ( 2009 ), “ financial integration and firm performance : evidence from foreign bank entry in emerging markets. ” review of finance 13, 181 – 223. an example of this view is veron, n. ( 2013 ), “ banking nationalism and the european crisis ”, october. van beers, m., bijlsma, m. and zwart, g. ( 2014 ), “ cross - country insurance mechanisms in currency unions : an empirical assessment ”, bruegel working paper 2014 / 04, march. sørensen, b. and yosha, o. ( 1996 ), “ channels of interstate risk sharing : united states ( 1963 – 1990 ) ”, the quarterly journal of economics, november. bis central bankers ’ speeches of two cross - border risk - sharing channels : private ownership of financial and non - financial firms and private insurance against banking crises. first, private ownership structures in the euro area do not offer much possibility for risk sharing. for one, european firms tend to have a preference for debt financing over equity, 9 which has so far been less suitable for absorbing losses – that is, until the adoption of the new bail - in rules for banks. and there is a pronounced home bias in the holding of that equity, meaning losses are not shared across borders. only 44 % of equity issued in the euro area is held by other euro area residents. thus, equity market integration falls well short of what we might expect in a single market in capital. the low level of cross - border ownership of retail banks also matters for risk - sharing. this has an equity aspect : whereas cross - border banks, in particular those that operate via branches, can in principle offset losses in one jurisdiction with gains made in other jurisdictions, national banks are exposed to concentrated risks. and it has a funding aspect : cross - border banks are less likely to be exposed to “ sudden stops ” as intragroup funding acts as a shockabsorber.

currently fare in achieving the two objectives of the single market, allocation and diversification? allocation looking at credit developments in the euro area, in my view we still have a way to go to separate allocation from location. there are two ways in which i see that location still matters for credit : via the location of borrowers and of lenders. first, in the euro area today it is the location of borrowers, rather than their creditworthiness per se, that matters most for access to finance, in particular for smes. credit supply in the euro area as a whole is most likely sufficient to meet aggregate credit demand. the problem is that cross - border frictions and high levels of uncertainty prevent credit markets from clearing. in a true single market, a creditworthy sme that could not borrow from a domestic bank would borrow directly from a bank located in another member state instead. thus, the more efficient supplier would take market share at the expense of the less efficient one. but the mismatch between credit conditions in the euro area core and periphery shows this is not the case. part of the explanation is that banks ’ credit assessments are influenced by the health of local sovereigns – rather than just the characteristics of the firm. but this is not the whole explanation. even if sovereign risk were zero across the euro area, most banks are not structurally set up to provide cross - border lending. direct cross - border loans to non - financial corporations 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. the upshot of this lack of contestability in national markets is that domestic banks gain significant market power. and recent research suggests that this is negative for allocation : where banks face limited competition in their domestic markets, and firms are more see for example krugman, p. ( 1991 ), “ increasing returns and economic geography ”, journal of political economy, 99 ( 3 ). bis central bankers ’ speeches dependent on them, financing constraints for smes have been higher. 3 this suggests that a more integrated retail banking market and more balanced financing mix would better support growth in the euro area. the second way in which location can affect allocation – the location of lenders – matters to the extent that non - economic factors influence banks ’ business decisions. one dimension to this issue is the connection between local banks and local interests. there is intrinsic value for retail banks