Ladies and Gentlemen,
On behalf of both the ECB and our co-host, the Commission, I am delighted to welcome you to today’s conference “Financial integration and stability: towards a more resilient single financial market”. In particular, it is my pleasure to welcome our distinguished speakers and panellists.
As you all know, the Eurosystem has a keen interest in financial integration and in the efficient functioning of the financial system. Financial integration helps to maintain balanced monetary and financial conditions and thereby fosters a smooth transmission of monetary policy throughout the euro area.
Financial integration also plays an important role for financial stability, as financial integration and financial stability can be mutually reinforcing. As evidenced by the years prior to the financial crisis, the stability of the financial system contributes to financial integration. At the same time, a more integrated financial sector typically improves the resilience of the financial system through more competition, better diversification and risk-sharing, as well as through more liquid markets.
The advantages of stable and integrated financial markets are manifold. They allow us to reap the benefits of the single EU market for capital and financial services. A better allocation of capital translates into lower prices, more choices for individuals, better business opportunities for firms and ultimately leads to higher economic growth.
Hence, for the last quarter of a century, the creation of a single market for capital and financial services has been a central goal of the European Union. Pursuit of this goal has generated many policy initiatives over the years. Most recently, the launch of the euro was a landmark achievement in this regard, and the Financial Services Action Plan has removed major obstacles to financial integration that stemmed mainly from legal and regulatory segmentation.
As a result of these policy initiatives, financial integration increased steadily in the years leading up to the crisis. However, the process was not homogeneous across all sectors. In some market segments such as the money and financial markets, financial integration increased significantly and rapidly. In others, however, the process was slower and, in fact, never completed. The case in point is retail banking.
Despite differences in speed in different sectors, it was widely assumed that financial integration was a continuous process, that financial integration was a one-way street once all legal barriers were removed. However, the financial crisis has demonstrated that financial integration cannot be taken for granted: the process of financial integration was brought to a halt and even reversed in some market segments.
I see two main reasons for this development. First, some market developments before the crisis were not really signs of increasing integration. What I am referring to is the complete compression of cross-country yield differentials before 2007. While the compression had been interpreted as an indicator of financial integration, it was, in fact, a sign of a systematic underpricing of credit risk.
And second, the pre-crisis institutional set-up had shortcomings and proved unable to support the single market in times of crisis. Regulation, supervision and crisis management had been organised along national lines, with some elements of cross-border cooperation. This approach was incapable of adequately preventing the build-up of risks. Moreover, when the risks finally materialised, the fragmented crisis management arrangements led to policy responses that were rational from a national perspective, but suboptimal from a European point of view. The fragmented arrangements also induced banks to withdraw behind national borders.
The resulting halt of financial integration, and even reversal in some segments, was the first setback in the European Union’s quest to achieve a single market for capital and financial services. To preserve the benefits of a single market and to reverse these trends, decisive action has since been taken in different directions.
Where economic governance is concerned, new crisis resolution instruments have been created: the European Financial Stability Facility has been established, and the European Stability Mechanism will enter into force shortly. A key milestone in this respect is also the adoption of the “six-pack”. Let me take this opportunity to warmly thank the Commission for the work that has been done in these areas through difficult times in the last years.
Regarding the financial sector, financial supervision underwent a comprehensive reform: three European Supervisory Authorities were established, and the European Systemic Risk Board now adds an EU-wide macro-prudential perspective that was missing before the crisis.
In addition, the regulatory framework is being overhauled with a view to strengthening the resilience of financial market participants and the financial infrastructure.
And finally, the EU framework for crisis management and resolution is currently being revised so as to address deficiencies highlighted by the crisis.
All these ongoing reform efforts are important steps towards closer integration. Looking forward, it will be crucial that the current initiatives are completed. Undoubtedly, these reforms are significant and would even have been unlikely without the crisis. However, it is also indisputable that financial integration is a process. Future financial developments will constantly put the institutional framework to the test. The current reform efforts are therefore part of the journey, and not the end of the road.
Let me close by wishing you all the best for an interesting and productive conference today. I am sure that the lessons of the crisis, the current institutional reforms and the future prospect of financial integration give us plenty of food for discussion.
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