Abstract
This paper reviews the experience of financial integration in the euro area since the start of the EMU and focuses on the possible impact that the implementation of the Banking Union (in particular the Single Supervisory Mechanism and the Single Resolution Mechanism) might have on the future process of financial integration. To that end, the paper first describes the main past developments in financial integration both at the euro area level and at a disaggregated level (e.g. in specific market segments) through a wide range of indicators. Second, it assesses the degree to which the integration process achieved the main benefits usually expected from financial integration (i.e. enhanced risk-sharing and improved capital allocation) while avoiding potential negative effects in terms of financial stability as well as it evaluates the experience of financial fragmentation during the crisis. Third, it provides some preliminary considerations on how the implementation of the Banking Union might affect some less positive elements of the past experience of financial integration if these tended to manifest themselves again in the future. Overall, the Banking Union is expected to have a positive impact by promoting a more balanced financial integration process and contributing to reducing the diffusion and negative effects of financial fragmentation in times of crisis. This enhanced quality of the financial integration process would be to a large extent the result of the Banking Union making the conduct of prudential supervision and bank resolution more effective.
Adviser to the Executive Board—European Central Bank (ECB). Views expressed in this paper do not reflect necessarily those of the institution. The author is grateful to Andreas Baumann, ECB, for his valuable research assistance.
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Notes
- 1.
Some provisions of the SRM Regulation (e.g. on the Single Resolution Fund and bail-in mechanism) will enter into force on 1 January 2016.
- 2.
For a detailed review of main benefits of financial integration see Baele et al. (2004).
- 3.
Both the SSM and the SRM are complemented by and based upon the Single Banking Rulebook (Capital Requirements Directive IV, Capital Requirements Regulation, Bank Recovery and Resolution Directive) applying to the EU as a whole.
- 4.
In approving the compromise with the European Parliament on the SRM on 27 March 2014, the Council stated that during the transitional phase of the Single Resolution Fund a common backstop would be developed.
- 5.
The BRRD provides that losses incurred by a bank first need to be covered by using the bail-in mechanism for a minimum of 8 % of the bank’s total liabilities and second use can be made of the national resolution fund for a maximum of 5 % of the bank’s total liabilities (experience of past banking crises indicates that governments provide on average financial support to banks in the range of 13 % of total bank assets).
- 6.
The FINTEC was presented for the first time on the occasion of the publication of the ECB report on Financial Integration in Europe 2014 on 28 April 2014 and details will be presented in the ECB report “Finanical Integration in Europe”, April 2015.
- 7.
The calculation of the FINTEC entails three steps: (i) homogenisation of all indicators through a transformation on the basis of the “cumulative distribution function” (CDF); (ii) definition of a theoretical benchmark of full integration; and (iii) aggregation of sub-indices through either equal weights or size weights.
- 8.
For the price-based FINTEC the theoretical benchmark for full integration is assumed to correspond to a value of zero for all price dispersions, while for the quantity-based FINTEC the theoretical benchmark for full integration is determined on the basis of a “market portfolio” approach (i.e. each investor replicates the market portfolio).
- 9.
Given that price-based indicators of financial integration are based on price dispersions which reflect also risk premiums, they may over/underestimate the degree of financial integration depending on how correctly markets price risks. If—as it is commonly assumed—in the run-up to the crisis markets were under-pricing risks, price dispersion was lower and degree of financial integration higher than in case of correct risk pricing.
- 10.
Financial centres include Canada, Denmark, Japan, Sweden, Switzerland, UK and US; core countries include Austria, Belgium, Finland, France, Germany, Netherlands and Luxembourg; peripheral countries include Greece, Ireland, Italy, Portugal and Spain.
- 11.
The offset coefficient was introduced for the first time in the ECB report on Financial Integration in Europe 2014 (Special Feature A on “Geographical segmentation of the euro area money market: a liquidity flow approach”).
- 12.
“Distressed” countries include Ireland, Greece, Spain, Italy, Cyprus, Portugal and Slovenia.
- 13.
These aspects are analysed in more detail in the ECB Report on Financial Integration in Europe 2014 (Special Feature B on “Divergence in financing conditions of small and medium-sized enterprises (SMEs) in the euro area”).
- 14.
Calculated on the basis of a “market portfolio” approach.
- 15.
These aspects are analysed in Sapir and Wolff (2013) and in more detail in the ECB Report on Financial Integration in Europe 2014 (Special Feature C on “Initiatives to promote capital market integration in the European corporate bond and equity markets”).
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Grande, M. (2015). What Kind of Financial Integration Under Banking Union?. In: Paganetto, L. (eds) Achieving Dynamism in an Anaemic Europe. Springer, Cham. https://doi.org/10.1007/978-3-319-14099-5_5
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