ECB signals risk of slowdown in the European financial integration process

In its third Report on Financial Integration in Europe published today, the European Central Bank (ECB) signals that there is a risk that the financial integration process in Europe will slow down as a result of the financial and economic crisis. This year’s report focuses on the impact of the financial crisis on the financial integration process. It notes that while significant progress in European financial integration has been made over a longer period of time, signs of retrenchment within national borders have recently emerged in certain financial market segments.

Financial integration is of key importance for the European Single Market and the ECB. First, it facilitates the smooth implementation of monetary policy and the balanced transmission of its effects throughout the euro area. It also contributes to financial stability by creating larger, more liquid and competitive markets which offer increased possibilities for risk diversification. Finally, financial integration fosters economic growth and welfare because it is beneficial to the further development and efficiency of the financial system. For all these reasons, the ECB considers that vigilance should be exercised to avoid a slowdown, or even reversal, of the financial integration process in Europe.

This year’s report also covers aspects of financial development. Financial integration and financial development are normally complementary and mutually reinforcing: integration fosters financial development by enhancing the competitive stimulus, and financial development helps to overcome frictions and cross-border barriers that prevent full integration. However, the ongoing crisis also shows that financial innovation can at times be implemented in ways that reduce transparency and lead to excessive risk-taking, ultimately harming financial integration. One example of this is the pursuit of certain types of securitisation through the creation of sizeable off-balance sheet structures.

The report consists of three main chapters. The first assesses the state of financial integration in the euro area based on a set of statistical indicators developed by the ECB. The second includes thematic sections (“Special Features”) containing an in-depth assessment of three selected topics.

The last chapter of the report provides an overview of the main Eurosystem activities in the field of financial integration in 2008.

If you would like to receive a hard copy of this report, please contact the ECB’s Press and Information Division at the address provided below. Alternatively, you can download the full report from the ECB’s website.