vitor constancio : financial integration and macro - prudential policy speech by mr vitor constancio, vice - president of the european central bank, at the joint conference, organised by the european commission and the european central bank “ european financial integration and stability ”, frankfurt am main, 27 april 2015. * * * ladies and gentlemen, the financial and sovereign crises have markedly changed our understanding of financial interactions in the economic and monetary union. we have experienced how quickly apparent integration among member states can unravel and how it can pose a threat to economic activity, job creation and price stability. the degree of retrenchment was particularly seen in the cross - border financing of banks and sovereigns. at the height of the crisis, banks which relied on cross - border wholesale markets saw their funding dry up and sovereign debt holdings retrenched behind national borders. the implications for the real economy were highly damaging. not only cross - border financing for investments dried up, but lending to the domestic real economy broke down. without fully developed cross - border capital markets, and with fiscal policy unable to provide full insurance, the euro area was left without risk - sharing arrangements. the free flow of capital should not be restrained beforehand, even though it does permit the fast unravelling in times of crisis. after all, free capital flow is a pre - condition for financial integration. instead, the conclusion is rather to promote initiatives that enhance risk - sharing across member states, such as the banking union and the capital markets union, and at the same time improve the overall regulatory and policy framework to reduce the incidence of crises. with the experience of this financial and sovereign crisis, we have improved our understanding of financial interlinkages, our datasets and ultimately also improved the regulatory and policy framework. in addition, an important change to the framework was the operational start of the ssm on 4 november 2014, when macro - prudential responsibilities were also attributed to the ecb. in the following section i will dwell on the importance of these macro - prudential powers for promoting financial integration. i will share first - hand experience in the implementation of macro - prudential measures and give my views on the requisites for a genuine capital markets union. i will finally conclude by outlining a path for strengthening the overall macroprudential framework. financial integration and macro - prudential policies macro - prudential policy is geared to promote financial stability through two key mechanisms : first

need for a supranational risk sharing mechanisms? ”, imf working paper 13 / 198. furceri, d., and a. zdzienicka ( 2013 ), “ the euro area crisis : need for a supranational risk sharing mechanisms? ”, imf working paper 13 / 198. bis central bankers ’ speeches mean achieving a high level of financial integration in order to complete the single market in this area. full integration is reached if all market participants, with the same relevant characteristics : ( i ) face a single set of rules when they decide to deal with financial instruments and / or services ; ( ii ) have equal access to a set of financial instruments and / or services ; and ( iii ) are equally treated when they are active in the market. this level - playing field would contribute to stimulate cross - border risk - taking between eu member states. in the last two decades, european financial markets have increased their role in financing the economy and became more integrated in terms of cross - border holdings of financial instruments. however, the crisis impacted this tendency. in fact, the crisis revealed that part of this integration was driven by debt - based wholesale banking flows which were prone to sudden reversals in the face of shocks. in this context, let me make the following three points : first, the main benefits of cmu, entail the development of risk capital and the creation of a market based risk - sharing mechanism across countries as well as the promotion of access to new sources of financing. both these goals require a truly integrated european equity market which is of crucial importance in the cmu project. notably, an increased role for venture capital initiatives would depend on a mature equity market that could provide significant returns in successful ipos, offsetting losses in failing risky projects. second, these benefits of cmu will only materialise if the commission strives towards a high level of integration with its cmu agenda. this requires a high degree of ambition and decisive legislative action to create the conditions for capital markets to develop and integrate. these actions are often in politically controversial fields such as in the areas of financial product taxation and insolvency laws. third, despite positive effects on financial stability stemming from greater financial diversification and market - based finance, more integration can also entail financial stability risks. it can exacerbate the size and speed of contagion. in addition, the ‘ push ’ towards market - based financing may lead to the