By fragmentation, we mean episodes of deterioration in financing conditions in some euro area countries that are not warranted by country-specific fundamentals. In such cases, the interest rates in the affected countries are higher than in the other euro area countries, making the transmission of monetary policy uneven.
An important part of the regulator’s role is to lean against the tendency towards herding that seems to be a perennial feature of financial markets. This is not always a popular role but it is an essential one. For example, by imposing concentration limits, regulators can require banks to hold a more diversified and therefore less risky portfolio of assets.