an important innovation that carries substantial promise of better risk management and, ultimately, even better financial stability. it seems obvious that banks, which generally operate on a rather thin capital cushion, are not the institutions best equipped to carry the bulk of the systemic risks of housing booms and busts. why not allow international investors such as insurance companies, pension funds, sovereign wealth funds carry part of the risk? there is nothing fundamentally wrong about securitization – it was the recent complex, structured applications that went wrong. besides cheaper funding and better diversification of risks, there is yet another reason why we should be interested in financial integration and, as a part of it, increased securitization. in the coming decades, the global population will age. between now and then, those approaching retirement will want to save. as a result, there will be an increasing global demand for financial assets. those economic areas that are able to generate good - quality financial assets are going to be the winners in the global allocation of capital and financial services. securitization is one important way of generating such assets. the euro, competition and productivity as i noted in the beginning, the euro supports growth in various ways. better anchoring of inflation expectations creates a more secure foundation for contracts and spending decisions. broader home market helps european companies to utilise economies of scale. and finally, the euro creates a platform for financial integration and development which, in turn, are important determinants of competition and productivity. on this last aspect, rajan & zingales wrote a couple of years ago a provocative book, “ saving capitalism from capitalists ”. in the book they examined the various ways in financial markets spread wealth and opportunity. the message is that the most important function of financial markets is to promote competition and weaken the power of the incumbent. without well - functioning financial markets, economic power is in the hands of those who have liquid wealth, collateral and connections, not in the hands of those who have ideas. that is the recipe for stagnation. financial markets create the opportunities for newcomers to dislodge the incumbent, to leapfrog them by innovating. competition increases, monopoly rents fall, and productivity increases. if europe is to accelerate growth potential and promote the lisbon targets, increased competition is a necessity. many are familiar with the study by bayomi, laxton and pesenti from 2004, which suggests that increasing competition in the euro area to the us level could

to monetary policy, the euro has catalysed substantial integration. in particular, interbank markets are well integrated – or at least were, and hopefully will be again, once the turmoil passes – as are government bond markets and, increasingly, also corporate bond markets. on the other hand, much remains to be done in other areas. the infrastructure supporting bond and equity markets is fragmented and hinders competition. and, retail banking continues to be mainly national. even a cursory look at how, say, housing finance works in the eu reveals that eu citizens face a different reality in different eu countries. interest rate linkages differ, loan margins differ, fees differ, collateral requirements differ, and so forth. not all of these differences are undesirable ; some of them may, for example, reflect quite legitimate variations in attitudes towards risk. but it is difficult to avoid the conclusion that not all eu citizens have access to the same level of financial services. this carries a welfare cost, and that cost is carried by eu citizens in the form of diminished opportunities to allocate consumption and investment over time. ample evidence from various sectors of the economy shows that financial development goes hand in hand with financial integration. protected sectors seldom develop. and so it is also in financial services : it is the pressure of cross - border competition that will motivate innovation and productivity improvement. the best way to guarantee a high level of financial services for eu citizens is to remove the remaining obstacles to competition. better provision of services is one benefit of financial integration, better diversification of risks is another. in times of turbulence, domestic orientation of a bank may look like a benefit – after all, it insulates the bank from trouble originating from abroad. but a purely domestic institution is highly exposed to country risk ; when the crisis hits, it tends to hit hard, as we found out in the crisis fifteen years ago. the nature of diversification is that risks materialise more often, but each bank shares a smaller part of them. inherently, internationally diversified financial institutions are in a better position to weather turbulent times. this, of course, provided that we design appropriate regulatory and supervisory structures that allow holding cross - border institution to the same prudential standards as domestic institutions. going international is one way for a financial institution to diversify risks. another way is to securitize and sell those risks. i realise that this may sound like a bad idea these days. fundamentally, securitization is