• ECB Publishes Annual Report on the European Financial Integration Process
  • April 22, 2010 | Author: Darren M. Cooper
  • Law Firm: Alston & Bird LLP - Washington Office
  • Today, the European Central Bank (ECB) published its fourth annual Report on Financial Integration in Europe. The report, presented at today's Financial Integration and Stability: the Legacy of the Crisis conference  in Frankfurt, consists of three main chapters:

    1) Recent Developments in Financial Integration in the Euro Area - Assessing the degree of financial integration and development in various areas of the euro area financial system, including money, bond, equity and banking markets and each area's underlying market infrastructure. The report notes that the recent economic crisis affected financial markets to "very different degrees," such as money markets showing "clear signs of retrenchment within national borders," while equity markets "did not show any appreciable retreat from cross-border integration." The report indicates that as financial markets are returning to "more normal conditions in 2009 and 2010, the markets that had suffered most also returned more rapidly towards their pre-crisis integration levels."

    2) In-depth assessments of:

    • Banking Integration and Supervision in the EU - Reviewing the trends in cross-border banking integration over the past year and recent proposals for a new EU supervisory architecture, noting that while "the financial crisis has slowed down the integration process in the banking sector," this effect is "likely to be only temporary."
    • European Covered Bonds - Although nearly all countries have a legal framework in place to support the issuance of covered bonds, the market "continues to be considerably fragmented," and that there is still "considerable scope for further integration" of the European covered bond market by improving clarity, simplicity and comparability.
    • Harmonization in the Post Trading Sector - Noting that the financial crisis "underscored the crucial role that securities clearing and settlement systems play in financial integration and stability," and that integration in this area "continues to be hampered by legal, fiscal and technical obstacles." A major initiative underway is the development of TARGET2-Securities, expected to "revolutionize" cross-border securities settlement in Europe, by "establish[ing] single technical platform for the settlement of European securities trades in central bank money."
    • Stability Implications of Financial Market Integration and Development - Highlighting how "an extensive and under-regulated combination of securitization and banking, together with significant complexity in the design and valuation of securities" can "erode bank credit monitoring and undermine market transparency." To contain certain financial stability risks, the report cites academic and policymaker calls for increased market transparency, reduced complexity of financial instruments, effective macro-prudential supervision, crisis management and coordination of regulatory and supervisory policies across national borders.

    3) Eurosystem Activities for Financial Integration - Providing an overview of the Eurosystem’s main activities and contributions in the field of financial integration in 2009, including (i) advising on the legislative and regulatory framework for the financial system and direct rule-making; (ii) acting as a catalyst for private sector activities by facilitiating collective action; (iii) enhancing knowledge, raising awareness, and monitoring the state of European financial integration; and (iv) providing central bank services that foster European financial integration.