Financial Integration In Europe Improves Via Prices, But Market Depth Has Less Potential

The creation of a single deposit insurance is key to finalising financial integrationThe creation of a single deposit insurance is key to finalising financial integration

J.L.M. Campuzano (Spanish Banking Association) |The creation of a single deposit insurance is key to finalising banking union. At the same time, banking union is an obligatory requisite for a common capitals market. As is having an integrated financial market. European financial integration in goods and services happens because participants are subject to common rules when they take decisions, have the same possibility of accessing the market and are treated in a similar way once they are operational.

Market depth for investing and seeking financing should be the result of European financial integration. Financial integration is a relevant factor for financial stability and facilitates the transmission of monetary policy. A few days ago, the ECB published an update on financial integration.

The main conclusion is that financial integration is improving via prices, but there is less potential in market depth.

The improvement in the economy was key to this integration process in terms of prices, synonymous with less aversion to risk. But the ECB itself identifies the lower level of integration in volumes with the decline in transnational lending operations between financial institutions. Monetary policy measures have facilitated financial integration, but the excess of reserves generated in the banks has reduced the volumes of loans between lenders at a European level.

The growing importance of investment funds in Europe in a context of zero interest rates and the hunt for profitability also favour financial integration via portfolio diversification.

The fact that many big companies are having recourse to the wholesale market is also a good reflection of the diversified financing which expansionary monetary policy was after, including the purchase of private and public debt by the ECB itself. Banking union needs to be finalised and monetary policy progressively normalised to advance with financial integration.

It’s key that there are no distortions in the workings of the financial market, considering its fundamental role in the assignation of resources and in generating expectations amongst economic agents.