European Financial Integration Research Articles

European financial integration and global financial liberalization

We generally admit markets are integrated if the law of one price is verified. This approach, applied to financial markets, gives place to two complementary criteria allowing the measurement of integration intensity. The first refers to mobility, meaning the possibility offered to national investors to move their assets over the borders so as to place their investments wherever they wish. The second concerns assets substitutability, meaning the possibility offered to national investors to rearrange their securities portfolio by substituting the national assets for foreign assets and vice versa, following a change in their rate of return.

Financial Integration in Europe: Should the United Kingdom Banking Market Formally Integrate?

The segmentation of European banking markets illustrates the strength and influence of both the United Kingdom and the European Monetary Union markets and describes in part the phases of European banking financial integration. Initially indications of market efficiency at the weak-form level for each segmented market in prices and price first differences are provided. Then unlagged banking price first differences for each segment are regressed against those for the United Kingdom and the European Monetary Union markets using weighted least squares regressions. Indications of systematic and unsystematic risks in each pairwise system are thereby provided. Vector autoregressive, cointegration, causality and impulse response techniques for optimally lagged price first differences provide evidence of cointegration between the segmented European, the United Kingdom and the European Monetary Union markets. It is also evident that exogeneity in each pairwise model lies largely with the European Monetary Union. This in itself represents a strong argument for continuing European financial integration. The United Kingdom is demonstrated to be a powerful banking market. The European Monetary Union banking market would benefit from United Kingdom membership.

Globalisation, growth and institutions

We are currently in the second wave of globalisation. Despite the fact that over the past two decades a number of national financial and other barriers have been removed, there are still a number of national, regional and global factors that are slowing down the process of financial globalisation from trickling down to all parts of the world. This paper briefly discusses the process of globalisation and considers the human development index including education as a way of measuring economic growth and financial wealth in different parts of the world. The paper analyses the process of financial globalisation and the way some nations have become the recipients of more foreign capital than others. As a way of seeing the importance of both national and international economic and financial integration as important ingredients for sustained economic growth, the process of financial integration in Europe is analysed as a model for acceleration of the process of globalisation and sustained economic growth in this century. The 21st century is referred to as the Pacific century and hence financial integration in the Asia Pacific region (APEC) could create a new impetus for the EU to increase its internal integration including its fiscal policies as a way of remaining competitive in the global economy.

The Euro and Cross-Border Banking: Evidence from Bilateral Data

Has the introduction of the Euro fostered financial integration in Europe? We answer this question using a data set of banks’ bilateral foreign assets and liabilities provided by the Bank for International Settlements. The data cover the pre-Euro period (1995–1998) and the post-Euro period (1999–2005). We use information from 10 OECD reporting countries and all OECD recipient countries. Gravity regressions show a positive and significant impact of the Euro on bilateral financial linkages. This effect is stronger and more robust for banks’ foreign assets than for their foreign liabilities.

The Marketisation of European Corporate Control: A Critical Political Economy Perspective

We are entering into a new phase in EU corporate governance. More than ever, our action plan must be focused and based on a solid assessment of actual needs of market players and investors. 1 As Ch...

Markets in Financial Instruments Directive - The Way Forward in European Securities Market Integration?

European financial market integration and investor protection are the main objectives of the Markets in Financial Instruments Directive. The public discussion on the effectiveness of MiFID is still controversial before its entry into force in November 2007. We contribute to this discussion by comparing MiFID against selected aspects of regulatory and financial market integration theory and provide empirical evidence on MiFID driving changes in securities market structure. Four new initiatives in trade reporting and transaction business are discussed with their likely impacts. We conclude that MiFID is generally in line with theoretical requirements and therefore suitable to achieve its objectives. On the empirical side, new initiatives will increase competition. The market for trade reporting services will change significantly whereas new initiatives in transaction services are not able to differentiate themselves successfully in existent competition.

Pricing of Settlement Link Services and Mergers of Central Securities Depositories

This paper tries to contribute to the discussion on the role of securities settlement infrastructures for financial integration in Europe. It presents a model that can explain a well-known stylized fact of securities settlement, the surprisingly high fees charged by central securities depositories (CSDs) for settlement through links between CSDs. As the model turns out to provide a robust explanation for this stylized fact, it is then used to analyzes an important policy question, the welfare effects of mergers of CSDs.

Welfare Effects of Financial Integration

This paper compares four forms of inter-regional financial risk sharing: (i) segmentation, (ii) integration trough the secured interbank market, (ii) integration trough the unsecured interbank market, (iv) integration of retail markets. The secured interbank market is an optimal risk-sharing device when banks report liquidity needs truthfully. It allows diversification without the risk of cross-regional financial contagion. However, free-riding on the liquidity provision in this market restrains the achievable risk-sharing as the number of integrated regions increases. In too large an area this moral hazard problem becomes so severe that either unsecured interbank lending or, ultimately, the penetration of retail markets is preferable. Even though this deeper financial integration entails the risk of contagion it may be beneficial for large economic areas, because it can implement an efficient sharing of idiosyncratic regional shocks. Therefore, the enlargement of a monetary union, for example, extending the common interbank market might increase the benefits of also integrating retail banking markets through cross-border transactions or bank mergers. We discuss these results in the context of the ongoing debate on European financial integration and the removal of bank branching restrictions in the United States during the 1990s, and we derive implications for the relationship between financial integration and financial stability. Last we illustrate the scope for cross-regional risk sharing with data on non-performing loans for the European Union, Switzerland and the United States.

Intégration des marchés financiers européens : Priorité à la concurrence et à la diversité

European financial market integration : priority for competition and diversity Shaping the European financial markets remains an important political task. The political discussion on this issue has recently gained momentum at national and European levels. Therefore, stability and sustainability to safeguard smooth market development is of the utmost importance. The German Savings Banks Association is in favour of a design of the European financial markets that clearly focuses on diversity, competition and an organic process of harmonised supervision. Pluralist financial market conditions ensure efficient solutions for customers in Europe. JEL classification : G15, G18, G21

Le dialogue réglementaire Union européenne – États-Unis

The US-EU financial markets regulatory dialogue The European financial integration comes within a worldwide and evolutional context where the financial sphere plays a particular role. So the transatlantic relation between the European Union and the United States takes a prominent position in the financial integration. Due to new rules imposed by the growing economical globalization, Europe and the United States implemented last years a regulatory dialogue intended to better analyse common stakes. First, the author reminds the context in which this regulatory dialogue and the reasons of its establishment are set up. This article tries to highlight the consequences of such collaboration and assesses the first results and some future perspectives. JEL classification : F36, F42, G18, G28

Aller plus loin dans la construction de l’Europe financière

A deeper European financial integration The ambitious plan to construct a European internal market for financial services becomes every day more and more concrete. It is represented by the adoption and the realization of the Financial Services Action Plan (FSAP), adopted in 2005. FSAP allowed the development of a new approach for regulation, more opened, transparent and balanced. It is now necessary to use performed progresses to continue the European financial integration. A broad potential remains to exploit with more integration. It will reinforce competitiveness and effectiveness of the European financial area. Three types of efforts can allow to reach this objectives : consolidate European dynamics, better link the citizens to the successes of financial Europe and finally favour European industry in a globalized world. JEL classification : F36, G18, G28

Integration and competition in the European financial markets

Financial integration in Europe should affect the competition between markets and intermediaries and generate a convergence of both interest rates and margins among different countries. This paper analyzes both the evolution of the convergence in interest rates and the level of competition and its inequalities among the European banking systems for the period 1993−2001. The inequality index used—the Theil index—allows us to break down the inequalities into a country and a specialization effect. If the former effect dominates it would mean that national banking markets are segmented due to the existence of obstacles or barriers to integration. On the other hand, dominance of the latter effect would be related to the different level of competition depending on the type of banking specialization.

Reordering the Marketplace: Competition Politics in European Finance*

AbstractOver the last 15 years, Europe has seen the liberalization of national financial markets as well as the integration of these markets and their governance through the introduction of the ‘Lamfalussy process’. This article argues that we can best understand these shifts as one integrated project of market‐building in Europe, guided by distributional struggles over the terms of mutual markets access. To comprehend the complex linkages between private and public actors across levels of governance, we have to look beyond macro‐theories of integration and financial liberalization upholding an analytical state‐market dichotomy and adopt an integrative approach to theory, instead. Using the example of securities markets, this article argues that ‘competition politics’ are key to understanding European financial market integration.

European Financial Market Integration and German Cross Border Portfolio Flows

The paper analyzes the effect of European financial integration, especially of the EMU, on gross portfolio flows between Germany and 47 countries from 1987 to 2002. A gravity model of asset trade a la Martin and Rey (2004) is estimated. The following results are found: (1) There is substantially more portfolio trade between Germany and countries also participating in stage one and three of the EMU. More specifically: Since 2001 cross border portfolio flows between Germany and EMU countries are significantly larger compared to flows between Germany and Denmark, the UK, and Sweden which are part of the EU-15 but not of the Euro area. (2) Developments intertwined with the formation of the EMU such as changes in exchange rate volatility, financial market development and increased real economic integration among EMU countries are not able to account for this effect. (3) The EMU effect on gross portfolio flows is larger for transacting countries with more developed banking and equity markets and for country pairs with more correlated business cycles.

L'intégration du système financier en Europe

Résumé Cet article vise à faire le point sur les facteurs et les obstacles à l’intégration du système financier européen selon plusieurs axes d’analyse : nous analysons de prime abord les facteurs et les obstacles à l’intégration des marchés financiers et du secteur bancaire européen, en particulier les facteurs de l’intégration financière liés directement à l’unification monétaire : la mise en circulation de l’euro apparaît alors comme un stimulant à la consolidation du secteur bancaire au niveau pan-européen. Dans ce cadre, il faut attendre des effets positifs de la consolidation bancaire pan-européenne pour les entreprises européennes, mais aussi une plus grande possibilité pour les banques européennes consolidées de mutualiser l’ensemble des coûts informatiques sur l’ensemble de la zone euro. Pourtant, l’euro ne favorise pas de manière aussi puissante l’intégration des marchés financiers européens et, en particulier, les marchés d’actions dominés par les Bourses traditionnelles aux intérêts antagoniques. Enfin, nous insistons sur les avancées et les réformes pour un développement accru de l’intégration du système financier européen. À ce titre, le « Plan d’action » en faveur des services financiers adopté par l’Union européenne prend acte de ce que nombre d’obstacles réglementaires sont à aplanir, en vue de créer l’environnement dans lequel concurrence et technologie pourront, à un certain horizon de temps, conduire à des marchés de capitaux, tout particulièrement des marchés d’actions, à des conditions d’accès beaucoup moins coûteuses pour les investisseurs.

The Assessment: European Financial Integration

This paper reviews the objectives that lie behind the Financial Services Action Plan (FSAP) to integrate European financial markets and the degree to which these have been achieved to date. It records that there has been substantial progress in many areas, but less elsewhere. It concludes that effective enforcement of home-country authorization and single-passport principles is critical to the attainment of full market integration. It argues that this requires the application of competition policy to cross-border mergers and possibly an extension of the scope of competition policy in financial services. Continued efforts will be required to remove regulatory differences that make foreign entry and operations more costly than domestic ones and to improve the consolidation of and the international access to clearing and settlement systems. The article supports attempts to integrate retail financial services in the post-FSAP period, while acknowledging the limitations that exist to the geographical expansion of these markets. Copyright 2004, Oxford University Press.

Measuring European Financial Integration

In this paper, we present a set of specific measures to quantify the state and evolution of financial integration in the euro area. Five key markets are considered, namely the money, corporate-bond, government-bond, credit, and equity markets. Building upon the law of one price, we have developed two types of indicators that can be broadly categorized as price-based and news-based measures. We have complemented these measures by a number of quantity-based indicators, mainly related to the evolution of the home bias. Results indicate that the unsecured money market is fully integrated, while integration is reasonably high in the government- and corporate-bond markets, as well as in the equity markets. The credit market is among the least integrated, especially in the short-term segment.

Politics or markets? The determinants of cross‐border financial integration in the NAFTA and the EU

One of the most striking political developments of the past two decades has been the heightened interest at both a practical and theoretical level in new institutional arrangements that may be driv...

Cross-Border Securities Clearing and Settlement Infrastructure in the European Union as a Prerequisite to Financial Markets Integration: Challenges and Perspectives

The importance of an efficient securities clearing and settlement system lies on the safer transfer of ownership of assets against payment. Such a system must be developed in a way to minimize the risks involved on securities transactions, and it must still offer lower costs, which do not hinder the intention to acquire or dispose securities. The cross-border securities clearing and settlement transactions within Europe, especially equities transactions, are still much higher and riskier than if cleared and settled domestically. The fragmented structure of local securities depositories is hindering the integration of financial markets in Europe, because investors are not stimulated to enjoy opportunities cross-border. Thus a smoothly functioning integrated infrastructure for clearing and settlement within the European Union is a precondition to further developments of the single financial market. The immediate benefits of financial integration in Europe are economic growth. Benefits under the investors' perspective are higher risk-adjusted returns on savings, better position to diversify portfolio, as well as higher liquidity and competition in the capital markets. On the other hand, corporations would also be favored with better access to financing capital, and competition would force financial intermediates to offer a wider range of financial products at lower prices.

The European architecture of regulation, supervision and financial stability: A central bank perspective

In December 2002, the Council of Economic and Financial Affairs (ECOFIN), which comprises the ministers responsible for economic affairs and finance in the European Union, approved a fully-fledged reform of the institutional architecture of financial regulation and supervision in the EU. The main aim of this reform — which followed a similar reform conducted in the field of the securities markets — is to solve the problems which have been experienced with the EU legislative process in the past. Confronted with a rapidly growing and innovating financial sector, the European legislative process appeared to react in a slow, rigid and inefficient way, thus calling for a thorough overhaul. At the same time, the arrival of the euro and the ongoing process of financial integration in Europe required more attention to be paid to cooperation between regulatory and supervisory authorities, both across sectors and across countries, in order to obtain a better knowledge of European cross-border financial activity, allow for convergence towards the best supervisory practices and ensure financial stability. The reform approved by ECOFIN foresees a sectoral and decentralised model of financial regulation and supervision, which is neutral as concerns the institutional arrangements of such functions at national level and ensures the cooperation between the national regulators and supervisors of financial markets across countries.