The degree of integration in the euro area varies considerably across different market segments. The euro money market is already highly integrated, as it is closest to the single monetary policy and supported by area-wide large-value payment systems, such as TARGET or EURO 1. An important exception is the market segment for short-term debt securities, which shows some fragmentation owing to the prevailing differences in market standards and practices. The bond markets are also relatively well integrated. For instance, the cross-border holdings already constitute around 40% of the total of the long-term debt securities held by monetary financial institutions. Equity markets are less advanced than bond markets but show signs of increasing integration. For example, the proportion of variance of equity returns explained by euro area shock is around 38% when measured over the period of 1999-2007. Still relatively fragmented securities clearing and settlement systems continue to constitute obstacles to the further integration of securities markets in Europe. In general, wholesale and capital market-related activities of banks show solid signs of increasing integration, while retail banking and the underlying retail payment systems have remained more fragmented, as has been the case for mortgage markets. Finally, as was discussed in detail in an ECB staff presentation earlier during this Symposium, financial markets in the member states that joined the European Union in 2004 are significantly less integrated than those in the euro area.

2  Ecinci, Kalemli-Ozcan and Sorensen (2007), Financial integration within the EU countries: the role of institutions, confidence and trust, NBER working paper. BIS Review 17/2008  1  Research presented this afternoon also threw a positive light on the role of financial integration with respect to Central and Eastern European countries. In fact, this contrasts a bit with some previous literature that argued that developing and emerging market countries are less able to reap the benefits of financial integration. One paper argued that foreign banks appear to allocate credit more efficiently than domestic banks in this region. 3 And, accordingly, another finds that financial integration has helped convergence and economic growth in Central and Eastern European countries. 4 Financial integration is also of key importance for the performance of the tasks of the Eurosystem. First, a well-integrated financial system enhances the smooth and effective transmission of monetary policy throughout the euro area. Second, financial integration is relevant for our task of contributing to the safeguarding of financial stability. Integrated markets reinforce the shock-absorption capacity of the system, as they are more liquid and offer better opportunities for financing and risk distribution. Finally, without prejudice to the main objective of price stability, we support the general economic policies of the European Union. What is the current state of European financial integration? Here I will be very brief today, as I have characterised this already at various occasions in the past and as financial integration is not a fast-moving process.