A well-known study found that around two-thirds of economic shocks are absorbed via integrated financial markets in the US. By contrast, studies on the euro area suggest that credit and capital markets are much less effective in smoothing income.
7 The explanation for the limited degree of risk-sharing in the euro area can be found in the relatively shallow type of financial integration that evolved before the crisis. In the banking sector, integration of interbank markets proceeded much faster than integration of retail markets. Thus, most banks’ assets remained concentrated in their local markets, while their liabilities were mainly comprised of short-term debt.