Indeed, from the inception of the Lamfalussy framework we have argued that this innovative institutional approach provides an appropriate basis for achieving the heightened degree of cross-border convergence and cooperation which is required. One of the key advantages of the Lamfalussy approach is the  BIS Review 86/2008  3  combination of a decentralised set-up with cross-border coordination at EU level. A decentralised approach is in line with the national responsibilities for safeguarding financial stability – relating not only to financial regulation and supervision, but also to financial stability monitoring and assessment, crisis management, and deposit insurance – while also allowing for the benefits of geographical proximity and the established experience and knowledge of local authorities to be drawn upon. At the same time, it is clear that the accompanying coordinating mechanisms need to be sufficiently strong, and this has not been the case so far. Therefore, a key priority on the EU financial services policy agenda is the effective and timely implementation of the measures that will allow the full benefits of the Lamfalussy framework to be reaped. Let me now turn to the work underway on enhancing securities clearing and settlement that is underway in Europe. Given the existing fragmentation of the securities market infrastructure the post-trading costs of cross-border securities transactions in the EU are excessively high and this constitutes an important impediment to the enhanced integration of European bond and equity markets.

The move to a single shared platform with TARGET2, which on 19 May 2008 fully replaced the former TARGET system, will render wholesale euro payments even more integrated and efficient. Bond and equity markets also show clear signs of integration, especially the government bond markets. Progress has also been achieved in the corporate bond markets and, to a lesser extent, in equity markets. Both bond yields and equity returns are increasingly driven by common factors and the cross-border shares of bond and equity holdings have been growing to 60% and one third of total holdings, respectively. This suggests that euro area investors are progressively diversifying their portfolios on a cross-border basis. At the same time, country-specific factors still play an important role, especially in corporate bond and  1  London Economics (2002), “Quantification of the macroeconomic impact of integration of EU financial markets”, Report to the European Commission. 2  See the Report on Financial Integration in Europe at http://www.ecb.europa.eu/pub/pdf/other/financialintegrationineurope200804en.pdf. 2  BIS Review 86/2008  equity markets. A key obstacle to greater bond and equity market integration is the lack of a sufficiently integrated infrastructure for securities clearing and settlement in the EU. Substantial progress has also been made on the integration of banking markets, namely in the wholesale and capital market-related segments. Cross-border interbank loans have increased to almost a quarter of total interbank loans and euro area banks’ holdings of securities issued by banks in other euro area countries have almost tripled over the past decade.