Lucas Papademos: Presentation of indicators of financial integration in
the euro area
Opening remarks by Mr Lucas Papademos, Vice President of the European Central Bank, to
the press briefing, Frankfurt am Main, 30 September 2005.
* * *
Ladies and Gentlemen,
Welcome to the European Central Bank and thank you for attending this press briefing on
"Indicators of financial integration in the euro area". We will start with some introductory
remarks from my side. My colleague on the ECB's Executive Board Ms Gertrude
TumpelGugerell will then present the indicators of financial integration in more detail. With us on the
podium are the Director General Statistics, Mr Steven Keuning, and the Deputy Director
General Economics, Mr Philippe Moutot. All of us will be available to answer any questions
that you might have regarding this publication.
The publication of the indicators for financial integration in the euro area is a first for the ECB.
For this reason, and also in order to underscore the importance which the ECB attaches to
European financial integration and to highlight the particular informative value of these
indicators, we considered it appropriate to mark the publication of this report by inviting you
to this event.
Let me begin by addressing some fundamental questions which might be asked in this
context: Why did the ECB decide to produce such a set of indicators? What is the purpose of
this publication? The ECB seeks to foster further integration in European financial markets in
various ways and through a number of initiatives for the following reasons.
First, financial integration is important for the smooth and effective implementation of the
single monetary policy. It also facilitates and speeds up the transmission of the effects of
monetary policy on the euro area economy. Moreover, a financial system with
welldeveloped capital markets, being intrinsically forward-looking, can provide us with useful and
timely information about future economic developments.
Second, financial integration has implications for financial stability. As you are certainly
aware, the Treaty (Article 105(5)) calls upon the Eurosystem to contribute "to the smooth
conduct of policies pursued by the competent authorities relating to the prudential
supervision of credit institutions and the stability of the financial system". To this end, an
understanding of the links between financial integration and financial stability, and, in
particular, of the implications of financial integration for financial stability is essential. On the
one hand, deeper and more integrated financial markets offer better opportunities for
financing and risk diversification, and thus also help to improve the capacity of the
economies to absorb shocks. On the other hand, intensified cross-border financial links also
harbour the potential that shocks could be transmitted more rapidly through the euro area. A
potentially increased risk of financial contagion alters the challenges to financial stability that
we are facing. Against this background, the monitoring of progress towards more fully
integrated markets - as we are seeking to do with this new set of indicators - is useful for our
assessment of the outlook for financial stability.
Finally, and more generally, financial integration can help to promote the development and
modernisation of financial markets, institutions and infrastructures, thereby helping, through
various channels, to support economic activity and raise the potential for economic growth.
Deeper and wider markets encourage savings, offer more and better investment
opportunities, reduce the cost of capital and intermediation, and facilitate a more efficient
allocation of financial resources. In this way, they contribute to higher growth. It is for this
reason that the objective of fostering financial integration in the European Union is a key
aspect of the Lisbon agenda. In fact, financial integration has arguably been one of the most
successful components of the Lisbon strategy and further progress towards more integrated
financial markets is undoubtedly desirable.
The ECB has taken a proactive stance towards, and has been involved in several initiatives
aimed at fostering, financial integration, given its importance not only for the performance of
the basic tasks of the Eurosystem but also for the welfare of European citizens. It goes
without saying that we are also in close cooperation with the European Commission in our
efforts to promote financial integration. The pertinent initiatives of both institutions support
and complement each other. Regarding the specific fields of activity and expertise of the
ECB and the Eurosystem, we distinguish between four kinds of contribution.
First, public authorities can make a contribution by fostering collective action to overcome
possible coordination problems in the private sector. Right from the start of Monetary Union,
the ECB has sought to play this "catalyst role". The most recent example in this respect is
our support of the initiative for a Single Euro Payments Area.
Second, we provide central banking services that are conducive to financial integration, most
prominently by operating Europe's leading large-value cross-border payment system,
TARGET.
Third, we offer advice on the legal and regulatory frameworks for the financial system. For
example, the Eurosystem recently commented on the review of the Lamfalussy process1 and
on the European Commission's priorities for financial services policy over the next five
years.2
Finally, the ECB also seeks to provide economic analysis and research on financial
integration, in order to raise the awareness of economic agents and policy-makers about the
benefits of financial integration for the euro area economy. The ECB is in a unique position to
produce in-depth economic analysis and comprehensive statistics for the euro area as a
whole, by drawing on the expertise of its staff, by relying on direct interaction with major
financial players and by building on its role as a supranational institution at the helm of the
Eurosystem.
The publication we are presenting today belongs to this fourth type of initiative. In
discussions on European financial integration, the relevant arguments are often of a
qualitative nature. However, in order to properly monitor and assess the state of financial
integration, quantitative information in the form of indicators - as contained in our report - is
not only useful, but essential. We wanted to devise a way in which to capture, in quantitative
terms, the various dimensions of financial integration and to have a toolbox at our disposal to
monitor developments, measure progress and assess the state of integration of the different
components of the European financial system, that is, financial markets, financial institutions
and financial infrastructures.
The indicators that we have compiled focus on markets and cover the main financial market
segments of the euro area, ranging from the money market to retail loans and wholesale
equity trading. The statistics indicate that the degree of integration varies greatly depending
on the market segment. The unsecured money market has been fully integrated since shortly
after the introduction of the euro. The repo market is also highly integrated, albeit to a lesser
extent. Government bond markets have integrated significantly. The indicators for the
corporate bond market, which has grown considerably since the introduction of the single
currency, also point to a high degree of integration. Progress has also been made in the
integration of euro area equity markets, in which equity returns are increasingly determined
by common factors. However, banking markets are generally much less integrated.
These general findings - and I only wanted to refer to them very briefly - already
demonstrate that the indicators contained in the report will contribute to enriching the
discussion on the progress of financial integration with tangible evidence. I would now like to
give the floor to Ms Tumpel-Gugerell, who will present in greater detail these new indicators
and the report.
Thank you very much for your attention.