##ey yearbooks “ european single financial market 2005 / 2006 ”, published at the start of october. 6 this contribution is to be seen within the context of the eurosystem ’ s response, provided in august, to the european commission ’ s consultation on the priorities for financial services policies over the next five years. 7 as we explained, the eurosystem supports the key policy orientation of the commission ’ s green paper. let me give a brief summary of what we deem to be some basics for the further shaping of the regulatory and supervisory framework of the european financial system in order to foster financial integration. i would like to highlight two points. first, there is a need to proceed with the adoption of the remaining measures envisaged in the financial services action plan ( fsap ) in order to complete the regulatory framework, and hence, with the effective implementation and enforcement of such measures at national level. the field of securities clearing and settlement is an area in which further integration is needed to exploit in full the benefits arising from a pan - european securities market. a recently published paper by ecb staff summarised the situation of the integration of securities market infrastructures in the euro area. 8 the eurosystem supports the commission ’ s intention to put forward a proposal for a directive on securities clearing and settlement to complement the market - led removal of the “ giovannini barriers ”. second, we agree with the commission ’ s proposal for “ better regulation ” based on open, transparent and evidence - based policy - making, including an ex ante evaluation of possible costs and benefits. in its green paper, the commission in particular put forward retail financial services and asset management as areas where such efforts could potentially be made. in the case of retail financial services, i mentioned earlier our assessment based on quantitative indicators that integration is generally lagging behind in the field of retail markets. in the case of asset management, i would like to mention the eurosystem ’ s recent contribution in response to the commission ’ s public consultation regarding the enhancement of the eu framework for investment funds. 9 the eurosystem fully endorses the commission ’ s reflections to assess the possible need for further community initiatives in the area of asset management. we also stand ready to support any further work the commission may undertake in this field. by way of example, i would like to mention that we advised the council on amendments to the ucits directive, and stand ready to advise it on any future legislative initiative in the

econometric ) model estimation, investigating whether or not riskadjusted yield spreads have a systematic country component. in an integrated market, the proportion of the total yield spread variance attributable to country effects should be close to zero. our studies suggest that this market segment is fairly integrated in the sense that the country of issuance is only of marginal importance in explaining yield differentials. equity market other market segments have even more potential for further advances in the level of integration. in fact, the euro area equity markets are still quite fragmented, but a gradual integration process is ongoing. for example, our indicators show that stock prices across the euro area increasingly react to euro area - wide factors and news. another indicator to measure the degree of integration in euro area equity markets is the relative importance of sector versus country - based investment strategies. the indicator is derived by calculating and comparing the cross - sector dispersion with the cross - country dispersion of equity returns. the more integrated the euro area equity market is, the greater the pertinence of spreading investments across sectors as opposed to country - based equity investment strategies. our statistics show that the elimination of intra - euro area currency risk has encouraged integration in the sense that the “ home bias ” in the equity holdings of institutional investors has been significantly reduced. for the first time since 1973, the concept of sector diversification has, since january 2001, surpassed geographical diversification among euro area countries. nevertheless, the importance of the country effect is still too great for it to be concluded that the equity market is fully integrated at the level of the single currency area. banking markets a further example where integration is generally lagging behind is banking markets, whereby the degree of integration is also different for the types of banking activities, i. e. capital market - related activities, interbank ( or wholesale ) activities, and retail banking. cross - border interbank loans and holdings of securities have, in relative terms, experienced substantial growth. while securities issued by non - monetary financial institutions of another euro area country accounted for only 16 % of the securities held by euro area monetary financial institutions ( mfis ) at the end of 1997, this share has now reached almost 40 %, pointing to a higher degree of capital market integration in the euro area. and although loans granted between domestic mfis still account for more than 50 % of the total eu mfi loans, the respective euro area cross - border activity has increased from only 15 % at the