And the picture is similar on the life insurance side, with virtually all of the growth in UK life insurers’ balance sheets since the early part of this century coming from unit-linked products where the investment risk is borne by endinvestors (Chart 5). 4 The measures announced in the UK Budget a couple of weeks ago will add momentum to these trends. These will remove the effective requirement on most retirees to purchase an annuity with DC pension pots once retirement age is reached. This will increase the flexibility of investors’ portfolio choice. But it will also tend to place a greater onus on these endinvestors to manage the associated investment risk. These trends in the contractual structure of liabilities have risk implications for end-investors and the financial system as a whole. A key question, here, is how household behaviour is likely to respond to bearing these additional risks, especially in situations of stress. Will investors ride them out or run to the hills, stick or twist? It is impossible to know for certain. But experience during the crisis is revealing. Then, households in a number of countries exhibited acute risk-sensitivity and risk-aversion. For example, UK households responded to heightened market risk by reducing contributions to long-term savings products, such as life insurance and DC pensions. Household net contributions to life insurance and pension funds fell from £ billion in 2006 to £ billion in 2008. This suggests some skittishness on the part of retail investors when faced with investment risk.

By contrast, retail banking markets have remained fragmented so far. For instance, the cross-border share of loans to non-banks has more or less stagnated at a very low level, below 5%. Similarly, the cross-country dispersion of banks’ interest rates on loans to nonfinancial corporations and households has remained relatively high, especially with regard to consumer loans. Public sector action to foster financial integration Further efforts are needed to complete the single financial market, particularly in those areas where integration is currently lagging behind, namely in the corporate bond, equity and retail banking markets. While I would like to highlight again the primary role of market-led action in this respect, public authorities should nevertheless strive to facilitate progress. I see three main priorities at the current juncture, namely to: (i) further enhance the EU institutional setting for financial regulation and supervision; (ii) remove obstacles to cross-border securities clearing and settlement; and (iii) enhance the EU regulatory framework and market infrastructure for retail banking. The European financial integration process presents a twin challenge for the EU regulatory and supervisory architecture. First, closer convergence of prudential rules and supervisory practices is needed in order to facilitate the efficient operation of cross-border financial institutions and to safeguard an effective pan-European level playing field. Second, while financial integration increases the overall shock-absorbing capacity of the financial system it also increases the likelihood that financial risks may be cross-border in origin or nature. Against this background closer cross-border cooperation in monitoring and addressing financial risks is of the essence.