fernandez - arias ( 2001 ), “ foreign direct investment : good cholesterol? ”, in “ foreign direct investments versus other flows to latin america ”, edited by de macedo, j. b., and e. v. iglesias. see n. halov and f. heider ( 2011 ), “ capital structure, risk, and asymmetric information ”, quarterly journal of finance, 1, 767 – 809. see committee on international economic policy and reform ( 2012 ). “ banks and cross - border capital flows : policy challenges and regulatory responses ”, published online at http : / / www. brookings. edu / research / reports / 2012 / 09 / ciepr - banks - capital - flows. see a. popov, “ does private equity investment spur innovation? evidence from europe ”, ecb working paper, 1063, and “ on the real effects of private equity investment : evidence from new business creation ”, ecb working paper, 1078. see r. lucas ( 1990 ), “ why doesn ’ t capital flow from rich to poor countries? ”, american economic review, 80, 92 – 96, and p. o. gourinchas and o. jeanne ( 2007 ), “ capital flows to developing countries : the allocation puzzle ”, nber working paper, 13602. bis central bankers ’ speeches with a stringent enforcement of the macroeconomic imbalance procedure, 14 can help to alleviate such cross - border misallocations in the future. 5. conclusion let me conclude. although still preliminary, the recent signs of financial re - integration across several financial market segments have the potential to be self - reinforcing and unleash virtuous dynamics. the creation of a fully - fledged banking union can set incentives for more and better financial integration, in a way that will make the euro area banking sector less vulnerable to fragmentation along national borders and reduce pro - cyclicality in euro area economies. on top of being conducive to a more stable financial system, it will thereby be conducive to a more efficient allocation of resources. for once, there is no trade - off between efficiency and stability. see online : european commission > economic and financial affairs > eu economic governance > macroeconomic imbalance procedure. bis central bankers ’ speeches

corresponding standard deviation within domestic borders. this is a sign that market participants are demanding an extra premium to lend to counterparties located in other countries. this premium rises when market conditions are tense. during the crisis, this was the case for both one - month rates and 12 - month rates. as a consequence of the interbank market stress, the ecb had to step up its intermediation role, reacting with non - standard monetary policy measures, such as a fixed - rate full - allotment liquidity policy. bis central bankers ’ speeches there is a similar phenomenon in the overnight unsecured money market and the secured money market. the latter is usually more resilient in times of crisis. a significant rise in price differentiation in repo markets has occurred as market participants have increasingly taken “ correlation risks ” into account : the pricing of risk has become much more dependent on the geographic origin of both the counterparty and the collateral, in particular when these are from the same country. an additional sign of risk aversion is that market participants have shifted from the unsecured to the secured market. let me now address cross - border lending by banks. looking at price - based indicators, we see two different phases ; first, until 2007, a gradual convergence across countries of the rates that banks charged for new loans to non - financial corporations. and then, from 2008 onwards, a considerable reversal of that trend. cross - sectional variation is particularly pronounced for smaller loans up to €1 million. of course, higher credit risk in lending to firms from some countries in recession explains some of the observed cross - country variation, and higher rates on smaller loans may also be an indication of higher risk and of the agency cost of monitoring smaller projects. quantity - based indicators point to a relatively slower pace of financial integration in the retail banking sector before the crisis. overall, outstanding cross - border loans to the non - financial sector in other euro area countries increased by only a few percentage points over the last decade. for sure, the process of financial integration in retail banking – though steady and significant – was particularly slow. on the positive side, the reversal of that trend during the crisis has also been more muted than in other market segments. the evidence points towards a slow erosion of the earlier slow progress toward financial integration. bis central bankers ’ speeches in 2010, at the outset of the sovereign debt crisis, only three relatively small countries were strongly affected. later on, however, the bond yields of larger