Financial fragmentation has manifested itself in the form of strong divergences between sovereign yields and ensuing differences in the cost of funding across banks, depending on the country in which these banks operate.
In turn, owing to the relationship aspects of bank lending, cross-country fragmentation in banks’ funding costs have been reflected in a disparity of financing conditions offered to firms, with an increase in the dispersion in retail interest rates on loans, and especially small loans, to non-financial corporations.