Financial Market Integration in Euro Area——Development and Obstacles——

Zhang Jikang and Miss. Wang Xinhui

Center for European Studies, Fudan University

April 7~8, 2004

Financial Market Integration in Euro Area

Brief Review State of play in different market segment Brief introduction of two data analysis index Remaining obstacles Conclusion

Brief Review Definition and characteristics of integrated financial market

Removal of the relevant frictions and obstacles Facing a single set of rules Having equal access Being treated equally

Brief Review Historical development

Funding of EMU Removal of capital controls in1991 Start the single currency in January 1999 Fulfillment of FSAP( Financial Services Action Plan )

in 2004

State of play in different market segment In money market

Factors promoting money market integration

Common monetary policy TARGET, the common payment system Common information and communication system Accessible guarantee and collateral Swaps and forward rate agreements (FRAs)

State of play in different market segment In money market

Increased money market financing

Money Market Financing in Euro Shared More Than Doubled

State of play in different market segment In bond market

Increased bond issue High degree of openness Active market participants Increased liquidity

State of play in different market segment In equity market and stock market

Historical character of the Europe equity market

Dependency on the funds intermediated by banks

Relatively higher bank loans to corporate and lower stock

market capitalization**

Estimated by authors (2001)

structural change towards more market-based finance

Emerging integrated electronic trading platforms with less state exchanges

Registered record growth Whole new markets A number of Europe-wide equity indices established

State of play in different market segment In equity market and stock market

State of play in different market segment In equity market and stock market

structural change towards more market-based finance

Time-Varying Integration Euro Area Average GARCH 12-Month Rolling Estimates

structural change towards more market-based finance

From the table above, we can see

become highly integrated only since 1996

taken over from the US as the dominant market in Europe

State of play in different market segment In equity market and stock market

State of play in different market segment Related payments, clearing and settlement infrastructures

Mature infrastructure system

Simplification of payment system: Target Simplification of dealing currency: Euro Simplification of clearing and settlement system

State of play in different market segment Related payments, clearing and settlement infrastructures

Structural change in the trading platform

Number of Settlement System Comparison and Trend

Brief introduction of two data analysis index The efficiency of investment return

Less or no cross-market arbitrage opportunities

The law of one price

The expected same return of investment

Brief introduction of two data analysis index Exchange rate volatility

From Time-Varying Integration Euro Area Average GARCH 12-Month Rolling Estimates, we can see

Volatility in integration of stock markets remains A low degree of integration during 1992-93 and 1995 A very rapid increase between 1996-99 A leveling off in 1999-2000

Brief introduction of two data analysis index Exchange rate volatility

Time-Varying Integration Euro Area Average GARCH 12-Month Rolling Estimates

Remaining obstacles Impediment in market

Dealing preference

Growth prospect and expected return, instable bond issuance*

Transaction risk and cost though lower exchange rate risk

Home bias which resulted in the remained cross-border and industrial entry barriers such as retailing commercial bank industry

Remaining obstacles Political hindrance

Fulfillment of FSAP in 2004 Current structure of regulation and supervision Policy coordination among member states ECB policy implementation Different Fiscal Policies and ECB common

monetary policy

Conclusion

Though obstacles remaining, the trend towards a deeper, integrated and more mature financial market in Europe can not be reversed and will continue.

Thanks