Therefore more private financial risk sharing can significantly improve the macroeconomic stabilisation of the euro area and thereby the functioning of EMU.3 However, bear in mind that in recessionary periods, the power of this risk sharing mechanism is significantly reduced, in particular via the powerful credit channel. Let me point out that this channel accounts for about one-quarter in the United States and around 12% in the euro area, of the overall income smoothing that is achieved in both jurisdictions in normal times.4 Perhaps even more important, financial integration is also essential to foster economic growth. Integrated capital markets provide a wider source of financing and lower funding costs for households and firms and ultimately support innovation and the efficient allocation of capital. A financial system which allocates resources efficiently and is resilient to shocks ultimately supports the transmission of monetary policy and its effect on price stability. The banking union and the CMU affect different parts of the financial system at different stages of development, but follow similar objectives to achieve a more efficient and stable financial system. They are also complementary projects: work on them should run in parallel and require a solid monetary union. Completing banking union The first task ahead is to complete the banking union. Each of its three pillars, notably the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM) and the planned European Deposit Insurance Scheme (EDIS) address the risk of fragmentation.

Capital markets, after all, play an important role in sharing economic risks and in smoothing consumption.17 But even more fundamentally, they contribute greatly to innovation 5/9  BIS central bankers' speeches  and growth. Evidence increasingly suggests that while both banks and markets are important for the financing of economic growth, non-bank financial intermediation provides a relatively more powerful contribution to innovation and productivity-enhancing activities in modern sophisticated economies,18 also in the euro area.19 Importantly, complementarities between banks and markets increase, as the economy develops,20 and so deep capital markets will end up complementing banks as sources of financing. While the European Commission’s current CMU initiative is an important step in the right direction, a much more ambitious agenda for bolstering capital markets in Europe is needed in the future. Developing well-functioning capital markets which support economic growth across Europe requires a comprehensive approach. To that end, Europe needs to boost the supply of equity finance. Policies which stimulate individual ownership of traded shares, such as reducing the tax advantage of debt over equity or enhancing financial literacy, can have a material effect on public equity markets in Europe. At the same time, because stock markets often penalise companies which undertake radical, but uncertain, innovative activities, the contribution of private equity – particularly in the form of early-stage venture capital finance – is indispensable, as a critical mass of angel investors who can provide financing for medium-size projects is also needed.